10 years of failure and a way forward
"Mistakes are being made now. Money is being wasted now." This comment could have been made by anybody with passing knowledge of the rail industry at any time in the past 10 years. In fact, it was said two weeks ago by rail regulator Tom Winsor, speaking about the £9bn West Coast Main. Work to upgrade this line, Britain's carotid artery, has now lasted seven years. It still has no definite finish date.

The rail sector has endured 10 years of cack-handed make-do-and-mend. From the post-privatisation problems of 1994 to the technical crisis precipitated by the Hatfield train crash, from the collapse of Railtrack to the birth of Network Rail and the decision last month to take maintenance in-house – which signalled the network's arrival at the point from which it had departed. That move has completed the alienation of the network's private sector partners and pushed some to consider legal action to claim compensation. Many complain about the way the operator has treated them; they say it is poaching their staff and that it has no good ideas about how to reorganise the procurement process.

In an attempt to get to grips with the continuing crisis, Building analyses what has happened to create such a loss of confidence among those involved in running our rail network. We investigate what lay behind Network Rail's announcement that it would do its own rail maintenance, look at the key problems that need to be solved and suggest a way forward.

The West Coast Main Line scheme is the most high-profile example of spiralling costs, but, as Rod Nathan, a risk manager with Davis Langdon & Everest, points out, cost control is just as pertinent for small-scale projects as for big ones. Without any cost certainty, Nathan says, the rail industry will continue to flounder.

David Thomas, director of corporate finance at the Strategic Rail Authority, told a recent RICS conference how a small-scale scheme can go wrong. Work to build a platform can start at £300,000 then end up costing £9m. How? "You find yourself struggling to comply with new safety arrangements. Then you find yourself interfering with other parts of the track and station and then with the overall capacity of the line and patterns of the track. A simple piece of brickwork leads to new track layout, new signalling."

Then there is the absence of common standards of signalling or communications systems between the UK and the rest of Europe, which means paying a premium to buy equipment here. In addition, there is widespread use of agency staff, again at a premium.

It is against this background that Network Rail made its extraordinary volte-face and took over the maintenance contracts.

Who's in charge?
One industry insider offered fateful words to Building in April after Network Rail announced its intention to take three maintenance contracts away from Amey, Serco and Balfour Beatty. "The new maintenance programme is a halfway house. This is pretty bad news for contractors," he said. Six months later, the rail network's entire £1.3bn-a-year worth of maintenance was in the hands of Network Rail.

Despite the insider's prescience, this move came as a shock to many in the sector. It was commonly assumed that Network Rail would overhaul the maintenance regime but that it would continue to be outsourced. "We had discussions with them over a fundamentally different approach," one contractor said. He thought there would be a model similar to the Highways Agency approach to road maintenance, where there is early contractor involvement and a partnering approach.

The move to bring contracts in-house at the start of the year has provided encouragement for Network Rail. Building understands that since taking over one contract for the London-to-Reading line in March, the infrastructure firm found that it could do the work 20% cheaper. This led to it stating that it could make 30% savings. "With a bit more time and organisation, they think they can get to that additional saving," a source close to Network Rail claims.

However, many in the rail sector doubt the claim. First there is the logistical challenge of taking over the 18,000 staff that will transfer from the contractors to Network Rail. And Winsor has expressed the fears that contractors will cherrypick key supervisors and foremen from their defunct maintenance operations and redeploy them to other parts of the business. One rail consultant adds: "It's fairly arrogant of them to think they will take all the staff over. And if it's going to be done by the same people, why should it be any different?"

What's the role of the private sector?
While maintenance is now out of the hands of the contracting industry, renewal and enhancement work will continue to be outsourced. Yet there seems a fundamental dislocation between the industry and the client. Nathan summed this up at the RICS conference, saying that the industry needed to move away from a system in which contractors "did what they were told". He concluded: "Railway costs are not predictable – and nobody can plan investment if they don't know the costs."

Michael Byng, who runs his own consulting business and chairs the RICS rail strategy group, also sees a continuing gap between suppliers and client. "My worry is that we do not use the contracting industry to its potential," he says. "Contractors are dying for repeat business – if they get it, it gives them confidence to invest in people." He is additionally concerned about a continuing skills crisis. "There is an endemic use of agency staff, with higher-than-acceptable costs and no retention or transfer of knowledge – it's a stopgap approach."

Others in the sector remark on the dislocation caused by the change. Lord Tony Berkeley, chairman of the Rail Freight Group, expresses frustration that the industry is not being listened to. "There is a tunnel in Ipswich that will be closed next year, but is that necessary? I know that the contractors came up with ideas to keep it open," he says.

The crisis in private finance
The government's spending plans for rail this decade rely heavily on private finance, but the state of the market is hardly calculated to attract infrastructure investment. Brian Marshall, an infrastructure financier at MacQuarie Bank, told the RICS conference about the doubts among those considering backing rail schemes, saying: "I feel that the opportunity for private finance in railways in the hardcore mainline network is extremely limited." According to Marshall, the risks of working in the sector are too high and the lack of infrastructure PFI or PPP schemes are holding back confidence. "There are not enough schemes to create an industry," he said, adding "there is a mistrust among investors in the commercial rigour of the UK rail industry".

The only flicker of hope is for off-line projects, such as redeveloping train stations, which Marshall believes could offer revenue from developing retail outlets. "That … would be interesting to the private sector from a finance point of view," he said.

Updating the procurement system
Nathan claims that the rail industry is in the dark ages in terms of its procurement culture. "It is an immature and naive marketplace compared with general civil engineering and construction," he says. "The methods of cost control are light. There is a failure in the industry to recognise the need to adapt to the modern marketplace."

According to Nathan, the culture is driven by its previous structure. "The whole of the industry is organised regionally. Much of it relates back to the former rail companies of some years ago. The power base in that makes that a real brake on proceeding with projects," he says. Nathan gives the example of a local Network Rail manager on the West Coast Main Line, who "will not pass any of the completed work in his region until his pet project is done."

Is there a future?
Some in the sector still have good reasons for doubting whether Network Rail can change. One experienced rail quantity surveyor has seen it all before. "Things come around. One day we are working one way, the next day it's another," he says. "I am not quite sure what Network Rail are up to at the moment. I just do not see a game plan."

Clearly, everybody in the industry wants stability. Winsor, who often seems a lone voice of sanity, sums up what is needed. Even as a scourge of the high-spending Network Rail, he sees that it must be given time. "I am not willing to put Network Rail under perpetual reviews of its funding. It's essential to have a stable and predictable framework," he says.

Transport 2000 is cautiously optimistic about the future. Campaigner Mick Duncan says: "Network Rail's taking-over of the maintenance work and the SRA's new hands-on approach to franchising represents a much more integrated and, indeed, interventionist railway."

It is to be hoped that both Network Rail and the SRA will give trust and confidence back to the consultants and contractors. The challenge of getting the system running properly remains, as Byng puts it: "like turning Stephenson's Rocket into Eurostar".

A poor track record: Three key dates in the rail crisis

  • 1996: Start of the West Coast Main Line
    A recent report on the change in rail costs since the demise of British Rail highlights how bad things have got. The Rising Costs of Britain’s Railways, written for lobby group Transport 2000 by Roger Ford, concentrates on the largest scheme undertaken in the past decade. Ford’s report charts the increase in costs from its inception by Railtrack in 1996 to last year (see chart).

    The changes in the cost-per-mile figure reflects the changes that have been imposed on the scheme, from the initial plan to provide for 125 mph tilting trains to 140 mph trains and now back to 125 mph trains. Beyond this, Ford’s report identifies flawed technical decisions on signalling, and changes in technical strategy, scope and specification. He gives an example of upgraded power suppliers specified and then abandoned by Railtrack, and then been reintroduced on the orders of the Strategic Rail Authority. Signalling policy also continues to change, the report adds.

    Despite a hauling-in of costs by the SRA, which this June introduced a cost cap over the scheme of £9.9bn, it still faces an uncertain future. Rail regulator Tom Winsor has called for the scheme to be delayed by a year to save more money, yet the SRA wants to continue on programme, which will lead to completion in 2005. Amid continuing doubts, it is no wonder that the project still haunts the sector. It has led to the end of major rail schemes for the foreseeable future – from now on, any renewal or modernisation work will be small scale, and will not begin until the new maintenance regime beds down.

  • October 2000: The Hatfield crash
    On 17 October, just after midday, the GNER King’s Cross-to-Leeds service derailed just south of Hatfield, killing four people and injuring 35 others. The accident was caused by a broken rail, which led to line closures, speed restrictions and widespread cancellations.

    The crash highlighted a serious deficiency in our knowledge of “gauge corner cracking” – the progressive deterioration of steel rails that can eventually lead to them breaking into pieces. A combination of the fragmentation of the network created after privatisation, faster and more frequent train services and the rebirth of the rail-freight industry were seen as contributory factors.

    The move had disastrous consequences for Railtrack, which admitted responsibility for the accident and had to pay out £600m in compensation and maintenance costs the following year. It also led to an overhaul of the way that maintenance was managed – decision-making was taken over by Railtrack and then by its successor, Network Rail, last year. This was the stepping-stone to the eventual decision by Network Rail last month to take all maintenance work in-house.

  • October 2001: End of line for Railtrack
    Late in 2001, the Labour government finally chose to address the Railtrack’s problems. The intentions of Stephen Byers (pictured), the then secretary of state for transport, may have been good but the move led to months of arguing with Railtrack’s angry shareholders while the government tried to put in place a new organisation to take over the rail system. The result was chaos. Just before administration, Railtrack had been planning to cut jobs from its 15,000 workforce, but these cuts never happened. Speaking at an RICS conference earlier this month, Winsor summed up what happened: “Rather than achieving efficiency improvements, the company went in the opposite direction. Costs went through the roof.”