The release of the Williams-Shapps Plan for Rail (“the Plan”) is an important moment for the UK rail industry as it seeks to address long-standing and complex challenges including: a desire for more industry-wide strategic coordination, the balance of returns and risks between the public purse and private sectors, and the complicated incentives across the contractual boundary between track and train management.
Whilst stakeholders face substantial change, it is essential that the new industry model proposed in the Plan be able to build on the best of privatisation over the last 20 years and its successes, including increasing passenger numbers and revenue, launching new routes and services, and the significant rolling stock and infrastructure.
We set out below the opportunities facing industry stakeholders, the questions that must be addressed through implementation to ensure the best of privatisation is built on, and three near-term considerations to ensure the Plan is a success.
The impacts facing stakeholders
As with any transformation of this ambition and scale, the creation of Great British Railways (GBR) will provide significant opportunities and challenges for the industry’s stakeholders.
- The Department for Transport, Network Rail and the Rail Delivery Group will need significant momentum to face the scale of change required, as they seek to combine their skills and experiences to form a new organisation that is more than the sum of its parts. This new organisation will have an important mandate to create an industry strategic and financial blueprint which captures the vision for GBR as set out in the Plan.
- Some operator groups (i.e. owners of train operating companies) may prefer lower risk Passenger Service Contracts (PSCs) and must find ways to create value without direct influence over many commercial levers. Operator groups who left the market in the past will need to consider whether the new contracts give them an opportunity to return to GBR.
- Rolling stock leasing companies and manufacturers will take comfort that their business models are not required to change, but will still need to consider how best to accelerate, design and finance new, greener rolling stock to respond to decarbonisation targets.
- The Plan sets out that the ownership, planning and operation of infrastructure will be centralised within GBR, with the Office of Rail and Road taking on an independent reviewer role and ensuring GBR remains accountable for performance and efficiency. This approach creates significant strategic and financial planning opportunities to target infrastructure investment where there might be greatest returns for passengers, as well as ensuring all infrastructure is of at least a minimum grade across the country.
- Ticket retailing will have a new, state-owned competitor, which will undoubtedly disrupt the third-party retailer market. Pricing must be fair and competitive and incentives provided to ensure continued private sector participation and innovation.
- Green and digital suppliers should search for new opportunities to support major infrastructure delivery across the network, preparing the railways for a low-carbon and digital future.
- Taxpayers and passengers will hope the Plan delivers improvements in value for money from the rail network. For GBR to deliver this, it will need to be structured and incentivised to optimise the offering to customers and to drive growth in revenue — while also delivering reliability, investment and safety across the railway system.
Learning from privatisation
To be a success, it is crucial that the Plan builds on the learnings and benefits of the privatised model of the last 20 years.
Key issues to consider are:
- How will GBR’s success be defined and measured to incentivise improvements in customer proposition, reliability, safety and industry profitability, when direct revenue growth incentives are reduced?
- What is the best way for GBR to continue to attract and retain the expertise and capital that has driven significant industry improvements during privatisation?
- How can GBR best build a customer-centric organisation with the appropriate skills, expertise and incentives to put customer needs above those of infrastructure management?
- How can the opportunity presented by combining track and train under one organisation best be used to address the long-standing issue of congestion across the network, beyond simply minimising the costs of delay attribution?
- How can local and regional interests be fully reflected within a more centralised industry structure?
- How should the industry re-prioritise capital investment in light of a sizeable revenue gap that is likely to persist post-pandemic when compared with 2019?
- How should the industry adapt to the inevitable lower levels of demand over the medium term as the nation recovers from the pandemic? What will be the new normal level of demand reflecting changing travelling patterns?
- How can the rail industry best interact with other modes of transport to ensure a seamless passenger experience not only within the network, but also for door-to-door journeys?
Three near-term actions for success
The Williams-Shapps Plan for Rail sets out an ambitious and challenging vision for the industry, and much work is required to ensure the Plan’s vision is implemented successfully. We see three near-term actions necessary to ensure this:
- Current industry stakeholders must align to ensure there is no knowledge lost in this transformational change to the structure and governance of the industry.
- The design of GBR must integrate carefully planned new incentive structures and KPI performance scorecards that put customers first.
- The future industry structure must be designed to accommodate private sector participation beyond operating train services in order to enable and encourage innovation, development of expertise and capital investment.
We would welcome the opportunity to discuss the Plan and its impact. L.E.K. Consulting supports the rail industry in corporate strategy, business planning, revenue forecasting, organisational change, policy development and M&A. Please contact the UK Transport Team.
We look forward to working with stakeholders to make the vision of the Plan a reality.
‘An Opportunity for Change in UK Rail’ was written by Andrew Allum, Partner; John Goddard, Partner; Becrom Basu, Partner; Stuart Robertson, Principal and Emma Edgar, Principal, at L.E.K Consulting. All authors are based in London.