Institutional reform in transport : the British Rail experience

THEWORD BANK POLICY, PLANNING& RESEARCH STAFF Infrastructure& Urban DevelopmentDepartment Rsporl INU4z Institutional-Reformin Transport THE BRITISH RAIL EXPERIENCE Sir RobertReid Chairman, BritishRailwaysBoard DISCUSSIONPAPER /'A   CONTENTS I. Introduction II. HistoryofPerformance Ill. InWtutionalHistory N. Reasonfor Change V. Descriptions ofActionsTaken VI. Impactof Other Gmnges VII. Evahratlonof Results  -INSTITUTIONAL REFORH IN TRANSPORT THE BRITISH RAIL EXPERIENCE 1. INTRODUCTION This case study has been prepared in response to the World Bank document 'Institutiorul R e f o m in Transport. Case Studies r Task Proposalg. The Bank had concluded J.r its 1982 study 'The Bailvays Problemg that the underlyin~malaise displayed by many railvays lay in their .institutiorul behavior, in particular their ability to continue to 'do all the wrong thingsg despite the pressures of the market place. It var also acknowledged that some developed countries had taken initiatives to address this problem. and the Bank expressed interest in understanding the process and context of these institutional reform. It also provided an analytical frunevork by which to give CLSJ writers a c-n approach to these issues. This paper attempts to follow the prescribed format as closely as possible. in the hope that this vill help the Review C d t t e e . It was presented to a railvay roundtable sponsored by the World Bank and the Austrian Verkchrrwissenschaftliche Gesellschaft in Vie- on 24th April, 1989. The paper will demonstrate that since 1982 British Rail (B.R.1 has successfully undergone a major institutional reform and :hat the fruits of this are evident in financial and operational results. It is not c l a h d that the process is complete as further work is still to be done. But undoubtedly a highly significant change has taken place in the character of B.R. as an institution. It now has clear objectives frca rmernment. It is delivering to these. This case study was presented at a Railway roundtable in Vienna. Austria. by Sir Robert Reid, C.B.E.. P.C.I.T.. Chairman. British Railways Board. It is based an the ,.,per presented by Hugh Jenkins. Managing Director. Transmark, to the World Bank on 8th Harch 1988 using published and unpublished material within B.R.  It was required to reduce the level of Government support through public service obligation grant for the passenger railvay by 251 in real terms between 1983 and 1986. It did so and better. It i s n w well into a secmd three year period h e r e the objective i s a further 251 reducti~nin the call on the public purse on the original base line. Confidence i s high that this w i l l also be achieved. The Intercity, Freight and Parcels sectors have been set commercial objectives md in addition to their financial objectives. the passenger sectors have formal quality of service objectives written into the Corporate Plan. B.R. n w has a clear business orientation. Investment decisions are based on businesu criteria and the five sectors are accountable for improvements to their bottom lines. Administration has been cut. The Divisional t i e r of management has been eliminated. Staff numbers continue t o fall. There i s a new recognition of the importance of the customer. Planning procedures have been overhauled to ensure commitment to objectives a t a l l levels. Direct cnmnmication with staff has been established. Investment procedures have been thoroughly overhauled t o include a full review of optiocs. business sponsorship. and independent appraisal. It has been suggested many outside parties that B.R. s experience i s an appropriate annlogue for railvays around the world in need of institutional reform. There are transferable lessons. and institutional developent should be central t o many technical assistance program. 2. HISTORY OF PERFOWhUCE The ey institutional reforms took place in 1982 and 1983. 1982 can - be regarded as the vntershed year. A very f u l l account of the financial and statistical performance of the British Railvays Board i s given in the published Annual Reports and Accounts. Copies of these have been placed with the World Bank and detailed information can be derived from that source. Some of the data has been sampled in this section in order to comply vith the Ionnat of the case study task proposal. but serious students of form are advised t o refer t o the very much greater range of information available in the Annual Reports and Accounts. In so far as the data are available. the sununary b e l w covers the period from . 1978 until 1987188. Up t o and including 1983 B.R.B. reported on a calendar year basis. 198415 was a transitional 15 month period. From 198516 the British Railvays Board reported on the basis of . years ending 31 Uarch. Specific results for individual passenger sectors did not' emerge until 190415. A map of the B.R. railway system i s included as Appendix *Ag.  the results for 1982 were inf~uencedby railway strikes and those of 1984 by the miners* strike which had a big impact on bulk coal movement and receipts. A factor in the decline in Group Turnover and to a lesser degree the group Balance Sheet war the privatisation of Hovercraft in 1981, British Transport Hotels and Sealink in 1983.  iuwswmi8.1 WmADY- T n i n lilr Tnlm dlr ...Lwd m W 0 E T - MiIn T c u (mh i m mila -?nl+Q .yyEE.%n ON LimaOut: nm.rrub mrn ~ I~ i m~i ~ t It iM I b ~ u o n y P = m l = c.tr..f SbW l m m w . L u l g W - s a a m . ~ om a a m L i m b i l i t i r k n r b h i a i - W - 7 7 7 7 . 5 - ma US T r U l W m iUO UU UU l4U L661 LIII LUI Cmm*LMMIF*DLILCIUOYII - Tot.1 T n i n liir:m: : 3 0 1 a o l p r n o W p r 2 s l l o r p l n r 8 8 Q . 1 tZ U a1 h r a l m I P l l W Za l l L 1 l2 - = Wb wb 4 d k i d r LamWOiWml #. mr 27m- Pm zrr Dpm Ooro am^ ~ ~ . c u i c Y. a n s w m a n a u a r r ou a u a m a o ~ r r m Rur m. # LY CP UI In In la irr 197 197 -. --.. W . t l o m M i l r per T o u m i l r T n i n Mi:. (Fraiaht)  3. INSTITUTIONAL HISTORY THE ENTITY LEGAL STAWS British Rail i s a public corporation. The British Railways ~ o i r d i s a public authority, appointed by the Secretary of State tor Transport. The principal statutes applicable t o the Board are Transport Acts of 1962 and 1968, the Railway8 Act of 1974 and Transport Acts of 1978. 1980. and 1981. The Acts confer appropri povers on the Board t o enable it t o carry out its functions. ~ I I ~ LEGAL CONTEXT The priumry duties of the Board derive from statute. They include the duty under the 1962 Act t o provide railway passenger servides in Great Britain, non-specific as t o volume, quality or mix, excdpt that the passenger services are t o be comparable generally v j t h those existing in 1974. ~ By a direction under the 1974 Act there is a Public Service Obligation (P.S.O.) for railvay passenger services in respect \of raich the Board i s compensated under EEC Regulation 1191169. a d r e is also a duty under the Transport Act of 1962 t o break-even w e r 11 taking one year with another a f t e r making proper provision for ape depreciation and r e n m l of assets. I I I POLITICAL CONTEXT I ! I Compensation for the P.S.O. is paid by central Government. Board also receives grant funds direct from the Passenger Transp rt Executives (P.T.E. 's) f o r v j o r conurbations outside London. Thqse ~ relationships are contractual. I But the Board i s also subject t o a constraint on t o t a l erte+l finances ( t h i s is grant plus borrowing). Investment plans are s u h i t t e d a s part of the Corporate Planning process. They r e p r e s k t the m h h u m level the Board considers necessary t o achieve the p l forecasts. The External Finance Limit (E.F.L. ) reflects Goverament's overall desire t o control public sector borrowing reduce the public sector borrowing requirement (P.S.B.B.) in economy a s a whole. The Government can also s e t financial targeks for individual sectors. ~ There is no statutory control of vages. nor of fares and charge 8. although the Department of Transport i s kept informed of the Board's intentions and may give general guidance about what it w u l d expeck. Although the British Railways Board discharges a statutory ro within a framework of Government policies. it is a pub1  corporation and not a department of State. I n the United Kingdom the concept of the public c.-?oration has evolved from that f i r s t envisaged during the post-war nationalisation period. A t that time it was widely believed as part of socialist doctrine (and enshrined in the famous Clause b of the Labour Party constitution) that the State should occupy 'the comaanding heights of the economym, and further that Public Corporations should a c t ( i n Herbert Horrisonms famous phrase) as 'high custodians of the public interest'. This very much suggested a 'public utility' rather than a comnercial approach. A t the present time in the UlC the number of public corporations i s i n decline. through the privatisation programne. Those that renuin have an "arms length8 relaticnship with Government, are given substantial freedom of mnagament action, and are expected t o behave conraercially in pursuit of firuncial targets. There i s no w e r - riding 'public senrice8 ethos. although in the case of railways there is a public semice obligation through the P.S.O. contract f o r passenger services. One effect of this i s retaining, on social gromds. services making substantial losses. particularly on secondary and rural lines, for vhich there is no purely comercia1 j.;ut~fication. ORGANISATIONM, HISTORY Railway!. in Great Britain have a long history dating back t o the opening of the Stocktun and Darlington railvay in 1825 and the Liverpool and Hanchester railway in 1830. Although the early period was characterired by the construction of many small private railways. 1836 8.u the beginnings of standardisation with the adoption of the standard gauge (4ft 8 112 inches), much t o the chagrin of Brunel and the champions of the broad gauge (8ft). In the great age of railvay expansion many small companies were formed. often duplicating each othersm routes. The peak of the 'railway mania' occurred in 1846 ~-fienno fewer t h a t 272 Acts were placed before Parliament seeking permission t o construct new railvays. It would be another 80 years before railways met any real competition from other transport modes. The f i r s t major reform vas the Transport Act of 1921, vhich required the separate companies t o amalgamate into groups. The grouping of 1923 established four geographical groups, which were the precursors of the Railway Regions a f t e r nationalisation. A contemporary Gazetteer l i s t s 153 separate pre-grouping railway companies. The four groups s e t up in 1923 were: The London Hidland L Scottish Railway (LHSR) The Great Western Railvay (G.Y.R.) The London S North Eastern Railway (LNER) The Southern Railway (S.R.)  The four railway companies continued from 1923 u n t i l 1948. The post-war Labour Goverrrmcnt embarked on a vholesale progranme of public ownership. In 1948 the railways vere nationalised, and for the f i r s t time the public encountered 'British Railvays' a s the railway arm of the British Transport Commission. On nationalisation, British Rail had 20,000 route miles, 52.000 track miles, over 6000 passenger stations, 20,000 steam locomotives and 650,000 s t a f f . It resembled an army and the Government turned to a Ceneral t o run it. The f i r s t Chairman of the British Transport C d s s i o n was General S i r Brian Robertson. Initially, B.R. acquired a m i l i t a q rather than a business management ethos. The comparative s t a t i s t i c s f o r the B.R.B. in 1988 shw 10,300 route miles, 23,000 track miles, 2,500 rtations, 2,400 locomotives and 161,000 staff (137,000 of vhich are employed in railways). In 1955 a railway modernisation plan was published. It provided major new investment into the railway system, abolirhing steam and replacing it by diesel o r electric traction. Track and signalling were improved and investment provided in stations and freight f a c i l i t i e s . With hindsight it cannot be claimed that a11 of t h i s money was spentwisely. Issuos like business need, standardisation, value f o r money, and even the strategic f tamework f o r the investment did not get the attention they perhaps deserved. Honey became available. Engineers took their plans dovn from the shelf and dusted them. Pew doubted that they were about t o experience a golden era of railvay renaissance. The idea that massive investment i s a certain cure t o railway problems l i e s deep in the railway psyche. The euphoria did not l a r t . Indeed it might have led directly t o the famous 'Bceching cutsm, f o l l w i n g the publication of the Beeching Report in 1963. Another problem caused by the Pbdercisation Plan vas that the single massive tranche of investment created assets which aged together. Thirty years l a t e r B.R. faced tke quality and maintenance problems of operating on a life-expired asset-base. and a massive rolling stock renwal problem. To avoid repeating t h i s mistake, current investment i n the replacement & . s e t s is being spread over a longer period. In this period it was recognised broadly that the soda1 role of the railways had changed. The competitive envirmment had been transfonued by the spread of car ownership and the growth of the road haulage industry. Railvays were no longer a monopoly. Dr. Beeching's central theme was t o recognise that the plethora of secondary routes and branch lines, a legacy from pre-grouping days, could no longer be sustained a t a tolerable financial burden because t h e i r social rcle had changed and their financial prospects were poor. I n the 1960s there was a rash of branch l i n e closures. The debate about the size and shape of the railway systere was settled by  surgery. Henceforth railvay management would concentrate on what it was good at, recognising the natural competitiveness of rail both f o r the movement of passengers and freight over trunk routes and f o r comrmting in major conurbations. The other side of the Beeching coin was the development of the trunk routes. Following the Beeching cots, the shape and size of the railway network have been relatively stable. Indeed the broad shape of the network is currently 'frozenm a t the 1974 level, although t h i s does not preclude B.R. from going through the closure procedures f o r uneconomic or duplicate routes. It is evident, however, that railway closure proposals a t t r a c t extraordinary high levels of public objection. The only significant proposal t o be considered recently, the closure of the Settle-Carlisle lines, has' become a cause celebre and a p o l i t i c a l 'hot potato' w e l l beyond i t s i n t r i n s i c importance. The proposal attracted ouzr 32,000 public objections including one from a dog, whose owner claimed it was a user! There is no public o r Government mood f o r closures a t present because closures would produce benefits very e l l by comparison with the action which i s underway t o control the passenger grant. After considering possible sale t o another operator the Government eventually refused consent t o closure and the l i n e vill now be fully integrated into the Provincial P.S.O. sector. Heanwhile the competitive environment has changed significantly. There i s a national motonray network: car ownership has grown continually; road transport, both passenger and freight, has grown more efficient: coach and bus semices have been de-regulated, and domestic a i r semices b e become well established. On the passenger side r a i l volume has held up, and in some cases grown, but market share has been l o s t in an expanding market. Nevertheless r a i l is still an important passenger c a r r i e r over inter-city routes and particularly f o r c-ting in the South East. TEE POLITICAL FRAHEWORK RELATIONS WITH GO- Up u n t i l 1983 the Bailways Board was not given specific management objectives f o r the industry. Hy pradecessor. S i r Peter Parker's participated in a grand public debate about the frzture of the industry in a quasi-political way. Bids were made f o r more investment often based on extremely optimistic forecasts (the 'hockey s t i c k mforecast syndrome). The idea was given wide currency that the railways were suffering from the 'crumbling edge of quality' and that massive investment was needed, both in infrastracture and maintenance. Hajor capital projects, such a s the Advanced Passenger Train (A.P.T. ) and network electrification were being pursued.  Serious attempt? were made t o negotiate a packege of productivity measures, but Lhese ran into union opposition, and led t o deliberate proscraotination. at!< finally t o a series of damaging strfies. The economy suffered a downturn between 1981 and 1983. Tiie rr~ilway financial situation deteriorated. The Government t e t up a Colnaittee on the Review of Railway Finances (knovn as The Serpel! Committee) on 5 May 1982 with the folllwing terms of reference, 'To excinine the finances of the railvay and associated operations. in tC1 light of a11 relevant considerations, and t o report on options for alternative policies, and t h e i r rolated objectives, de;igned t o secure improved financial result8 i n an efficiently run railwarr in Great Britain over the next 20 years.. These were needed t o provide the basis f o r long-term plalaaing decisions. It reported in 3982. I t s findings were controve~rsial and the Bailvays Board did much t o attempt t o discredit tbe report. But the underlying threat -*as real. Either the Board goq a better grip on the management of the industry o r a range of unpleasant items wruld appear on the political agenda, including the issue of system size, substantially untouched since Beeching. The Serpell Report argued the need f o r agreement between the Government and the Board on specific objectives and monitoring procedures. But it also pointed the way t o imprwemeut:~ in efficiency. modifications t o engineering and operating procedures, the scope f o r reducing British Rail Engineering Limited (B.R.E.L.) manufacturing and maintenance costs a ~ various other improvements. d It also endorsed the business management approach B.R. had taken in setting up the Sectors in 1982. Following the Serpell Report and my appointment t o the Chairmanship of the Railways Board. the issue of specific objectLve a s caken up by the Secretary of State. On mp appointment, Iindicated that I wanted clear objectives. and that I also wanted to be allowed to get on with the job of achieving them, A t h the minimum of political interference. GOVERNMENT OBJECTIVES FOR B.R. 1983 The f i r s t f r u i t s of this approach was the setting of n w objectives in October. These objectives supplemented the statutory and financial duties of the Board and a r e suumarizzd below: Thd guiding objective was t o run an e f f ~ c i e n t railway providing good value f o r money. Seroices should be reliable, attractive, and punctual a t acceptable fares and charges. The c h i : t o the taxpayer should be reduced. The B.R.B. should accelerate i t s pcblished Corporate Plan intentions and reduce the P.S.O. grant by 252 over three :years  not five. The Plan pr2dicted a P.S.O. requirement of L635m in 1983 prices in 1988. Thin vas t o be achieved by 1986. The Government did not vant the Board t o embark on a p r o g r m e of major route closurer. but asked the Board t o erplore the scope for bur substitution on SOM routes. It war the Board's responsibility to determine farer. However improved efficiency a r t make a fs1.l contribution t o keeping down farer. B.R. most not ure i t r market position t o rairla fares unreasonably. Freight should be brought into a current cost operating profit of 52 in 1988. while winning as much t r a f f i c from road an posrible. The Parcslr businese should continue t o make n proper c ~ r c i a return. l Improvements in the industrial rel-,.ions machinery must be sought. Sealink must be prepared for privatisation. There murt be more private sector involvement in the supply and support services, and the Board should continue t o develop m d dispose of property. Excess capacity should be taken out of B.R.E.L. m d future options for the cwpa?y explored. including privatisation. Rolline; stock should be procured by competitive tendering and the railway equipment industry should be allowed t o continue its1 design role. Investment p r o g r m e s shoulc! relate :o financial. m d business objectives. This was a very significant milestme in the institutional development of B.R.. Here. a t last, were clear objectives and a Board totally colrmitted t o achieving them. Relationships between the Bailways Board and the Department of Transport improved immeasurably. For a start. ve nu longer found ourselves on opposite sides in some grand debate about the future of the industry. The word went out within British Bail. It is not our job to criticise Government. It is our job to deliver managerially. In my case the Gcvernment is our banker mid also an important customer and must be treatad as such. The debate became internal. EXPLICIT GOVERNMENT INVOLVEUENT I N RAILWAY HATTERS The level of explicit Government involvement in the day t o day operation of the railvays i s low. When questions are asked about these things in Parliament the invariable reply i s 'that is a matter for railway management'. although t k i q c m be a difficult line t o hold given the temptations of p o 1 i t i . d involvement. particularly where ballot box advantage can be gawid. Tdere i s no direct formal involvement in personnel policies or wage m d salary structures. although the B.R.B. i s unlikely t o behave provocativel: in this field. Conversations with Ministers or the' Department of Transport on these topics are likely t o carry certain , nuances vhich c m be taken as ' g u i h c e ' .  The s t e e r on negotiating structure i n the 1983 objectives probably reflected fruatratiaa a t the ability of the unionv t o uar the complexities of the formal negotiating machinery as a delaying t a c t i c during the arid yrara of productivity bargaining. A major new B.R. Industrial Relatima reform initirtive vaa announced in 1988. Safety i a aubject t o atatutory control. w i t h the Railway Inspectorate established aa the approprir.te independent supervisory body. Hovever. railvay managera value their own profeaaionalism in aafety mattera and the relatimahip betwen B.R. uid the Railway Inspectorate has alvays been constructive. I n 1988 a Director. Safety vas appointed for tt-e f i r s t t h e t o build on B.R.*a already excellent safety record. The Railway Inagactorate inveatigatea major accidents and publishes reports. The d e v e l o p a t of aafety practice on B.R. over much t o the recanmendations arising from inquiries carried out by the independent Inspecting Officers . B.R. PERFORHAHt'E AWHST GOVE-T OBJECTIVES 1983 - 1986 During the three yearr betveen 1983 and 1986 British Rail applied i t s e l f t o the task of meeting thr Secretary of State's 1983 objectives. I n the AMual Report for 198617 1 was able t o report that the financial objective b d been achieved. The support from the taxpayer had c- down not 251 but 271, a reduction of L260m in real tenns. Passenger volume had also been restored t o 19.1 billion passenger miles - the highest level since the beginning of the decade. GOVERNMENT OBJECTIVES FOR B.R. - 1986 But t h a t was not the end of the atory. It was n w necessary to reduce, tbe c s l l on the public purse by a further 251 t o L555m a t 199617 prices by a r c h 1990. and achieve a commercial return on the non-supported businesses. The vehicle f o r conveying t h i s second set of Government objectives was once again a l e t t e r t o me from the Secretary of State. This l e t t e r , in October 1986, s e t out specific new objectives supplementing the statutory and financial duties of the Board. The n+w objectives distinguish between the auppcrted sectors (Provincial m d Network South East) .nd the non-aupported businesses (Intercity. Freight. Parcels and Freightliner). The 'rolling forward' of the October 1983 objectives required the Board to: -  - Reduce the Public Service Obligation (P.S.O. ) grant ircl L763m in 198617 t o L555m in 1989190 (L768m t o L574 in 1987188 prices1 I - I Achieve m w e r a l l 2.71 return on arretr a t current dort before interest -tithin the Non-Supported Seciorr (defined a8 InterCity, Freight, Parcels, ~reightlirberr md Travellers Pare1 by 1989190. These Sector8 a r e expected also t o plan on the basir rf a reqlired fate of return of 51 on their progrsnrnea of n w i n v e r w n t . I Implement vigorous mearures t o broaden the participa+ion of the private rector in the provision of rervice# to facilitate a more cost-effective and coupetiffive curtomor .emice. Specific p r o g r w s t o this endare required. ~ i~ This horporated a decision that the Intercity Sector w i l l c are t o qualify for grant beyond 1987188 md wuld be taken out of the P.S.O. In detarmlnlng the P.S.O. objective. the Secretary of State .tress on the quality of service expected within the P.3::: supported Sectors md indicated that: - I I - I In the Retvork Sootbeast (NSK) Sector improved efficidncy should prwide m improved service t o the customer, reddced aperating costs and a lower proportion of corts met by t h e P.S.O. grmt. Pares structures should increasingly ref qect the corts of provisim and improvements in quality of serv4ce. - I &1 In the Provincial Sector the pattern of aemices sh uld cantinam t o be tailored more closely t o demand and t 1::: -st, but vortkuhile reductions in P.S.O. grant will be required. The Board is asked to reviev thore cases attractive bus semices c ~ u l dmeet the needs of customer as canveniently and a t markedly less cost than present I services. I The objective for the ilm-Supported Sectors supersedes those s e t earlier for: - ~ Intercity - achieve a 51 return on assets a t cur cost before interest by 1988189 (Au 1984) Freight - achieve a 52 return on assets a t curtent cost before interest by 1988189 (Octqber 1983) I I I Parcels - continue to earn a proper comnercial re/urn (October 1983) I  The new P,S,O. and Non-Supported Sector objectives incorporate the e need for the Board to have flexibility to create objectives for ach Sector cwered by these arrangements and to vary them as circumrtances d w d . I i Internally B.R. converted the 2.71 objectives into rubsid ary objectives for each of the non-supported businesses. The 986 objectives included the need for the Board to develop qualit of semice standards for the passenger sectors and in response to t is, the Board published adjusted standards in the 1987 Corporate P an, which specified new standards for punctuality. 8emice provir on, customer response times, muimrrrn load factors and cle ing frequencies for the passenger businesses. THE POLITICAL AND CULTUUL ROLE OF THE ENTITY The political and cultural role of the railway system in ~ k e a t These are reflected by fundamental differences in philosophy. B.R. culture is now one of low subsidy and high fares. and s to population size. whether privatisation was the way ahead and set work in han railways seem to flourish more under Governments which favor nei public ownership nor notions of public service. Hanagers get a of 'reality therapy'. There is a realisation that survival dep nds on delivering to financial and quality targets. They get on lith the job. ~ HISTORICAL PERSPECTIVES ON TEE ROLE OF RAILWAYS I I Historically the role of the railways in Great Britain has o ten k been conceived in terms of public service. tfuch of the e rly thinking about railways was concerned with how to curb tpeir monopoly power rather than how to equip them to be competitivk in  I the market place. Uore recently the idea of service has re-emedged in a new guise- as an element of customer orientation having at its root business objectives. Later it became fashionable to view d . ~ . as a hybrid organisation, displaying a mixture of comnercial (and public service characteristics. But the distinction between the msocial railwaym .nd the * c ~ r c i a lrailwaym was alv8ys a fdlse dichotomy. Thm comaercial railway can never forget that giving a service to its customers. and the management of the railway must always employ comercia1 judgement. THE RAILWAY TRADE UNIONS The railway Trade Unions in the UK have always been reason ly strong. with an industry rather than a craft focus. In s-+s they have been impressively enlightened. For example they a st always support major investment in the industry even where the manpower reductions are substantial. But on issues like terms conditions of employment they are slow to accept change. and an almost pathological suspicion of productivity bargaining. , reaction in the prevailing climate. THE RAILWAY LOBBY The railway lobby is powerful on one main issue - closures. It b s become increasingly difficult to achieve even a minor line closure 1 without a huge public furor. There are probably economic argume ts in the UK which would point to the soundness of the case for furt er rail closures, if the only criteria were value for money provision of transport services. However it is probably politically untena le to pursue this except on the margin. This is why the ideas of us substitution within the 1983 objectives have borne little fruit so far. A watered down version re-appears in the 1986 objectives which refers to reviewing 'those areas where attractive bus semices co Id 1 meet the needs of travellers as conveniently and often at marke ly d less costs than the present rail services*. l I However, the geography of the adjacent road system has promising cases reviewed by the Board so far. It looks likely that investment in a single car version of  diesel unit i s the most cost effective solution t o the ruCal railway. . I : Under existing procedures where closure i s proposed the key i s ue addressed by the Transport Users Consultative C d t t e e s (wh ch report t o the Secretary of State) i s hardship. I CONPRONTINC THE PROBLEM I irn. In institutional terms, the problem came t o a head in 1982. Government was dissatisfied vith B.R.*s performance. The level. of accountancy convention, no true bottom line responsibility coul exercised. responsibility for receipts. Plans were put together in isolation by planners rather t an b implmnters, w i t h the result tbt they were paper exercises onFy. Historically, the problem had not been difficult t o confront, but previous solutions had been tried and failed. Neither hFgh investment, as in the 1955 modemisation plan, nor branch lline surgery in the Beaching era of the 1960's had solved the railTys problm. Furthermore the scope for deterioration seemed t o be greater than the scope for imprwement. I I I The min constraint on B.R. was the 'freezingm of system size a t the of opportunity. 4. REASON FOR CHANGE Financial performance was deteriorating. The Government environment was getting harsher. The Serpell Report had e various options for system size and there was a belief that WHY CHANGE WAS UBDF3TAKEN 1 It was recognised that t~ilwaysvere losing market share growing market. The passenger transport market in the UK trebled over 30 years and the Freight market had doubled.  now conveyed heavy l o r r i e s and luxury coaches around the countdy. ! Thirty years ago the r a i l share of the market had been 201 passen e r and 401 freight. It was now 71 and 91 respectively. Only i n Lon on commuting does B.R. retain market leadership with 401 share of 411 movement. Elail transport had sustained volume for i t s core busindss but hrd not shared in the grovth of the t o t a l market. I I A s a traditional inward-looking industry B.R. had been slow t o re c t t o change. The organisation was production-led and not responsfve t o customer demand. Staff did not believe that their futqre depended on satisfying the customer. Planning was centralised and lacked the determined commitment of line managers. Investment das needed, particularly where assets were a t the end of their usedul l i f e , but there was no commitment by Government t o invest (in 'I railways per se unlers it could be sham t o be a sound busin s s % case. There was also considerable pressure on B.R. t o reduce $he c a l l on the public purse. Open doubts were expressed about a b i l i t y of 1.8. t o give value for money. The orgmisation insensitive t o net revenue isruer. exhibited bureaucratic featu e r m d lacked proper lines of comunication t o the employees. I I 'inrurancem costs by low risk over-provision of f a c i l i t i e s in track layouts for example. UHY CHANGE WAS POSSIBLE CIRCUMSTANCES 1 4 Change had finally become possible i n 1983 for a number of reaso s: There was a consensus between Government and railway management t a t the situation was deteriorating and that was necessary. The issue was what kind of interpention. pressures on management were such that intervention was the only defensive strategy available. Between 1981 and 1983 the economic climate was fairly hostile. e)nd $ the downfall i n the economy, reflected i n the demand f o r r a i l e j services, had discredited the production-led strategies of British Railways Board, where the assumption had been that i f improve the quality and availability of the product, demand wo Id look a f t e r i t s e l f . 4 When this proved unsustainable and faced w i t h coach deregulation, B.R. went for high volume. through very low o peak fares. This was not an economic success. A more connnerc approach would have addressed the issue of 7arket positioning the pricelquality trade-off.  It would be wrong to suggest that 1983 was a sudden downwards. 1 Also between 1974 and 1983 some early specific objectives re coming through. For example Inter City was given interim firmic a1 targets based on i t s 'contribution', b u t t h e accountancy conventi ns then in force could not really identify the true range of Inter C t y I cort.8 and revenues myway. During the 1970s the vagueness of the remit and the lack iof discipline in target setting allowed the production ethos continue unchecked. But the setting up of the sectors in 1 provided for the f i r s t time the organirational means t o address possibility of a business-led railway. ~ PERSONALITY 1 Another key element was I was appointed as Executive Chairman in 1983. and I saw no reason why railway man2gement could not assert control over its destiny. There has been tuu main catalysts. The Serpell Report of 1982 had signailed serious threats. The message a t its simplest das 'put your OWRhouse in order o r else....'. The second catalyst w/as the NUR a d ASLEF railway trade union strikes of 1982. t h i s was two years befoze Hargaret Thatcher's classic Arthur Scargill and the NCRI. t o some extent the writing was on tpe wall. The Government was h a t i e n t a t B.R.*s apparent inability [to secure productivity improvements within a reasonable time 4 d without damaging industrial disputes. The Government was prepa ed t o be firm. There was frustration inside B.R. too. and the h s gained ascendancy in the dovecote. The days of fudge and smudge were over. and out of the strike emerged a much more tough-min ed no-nonsense approach t o the railway unions. whose power had ero ed anway d 4 I sensed that I could do a deal with the Goverunent. Hy ea l y dealing with Nicholas Ridley. the Secretary of State for franspo t. went well and there was an m e d i a t e change in the relationship v t h  the Department. The f i r s t success was agreeing a new kindl of . contractual arrangement. For '.:te f i r s t t h e a B.R. Chainnan was given explicit objectives. tough but achievable. But +re importantly I was given freedom to get on with the job, a perio stability without orert political interference. in which to s h y : could deliver. ~ SITUATION Another background factor was the clear role remaining within the m[ economy for a viable railway system. A successful mrdet- oriented railway wuld be a significant and valuable part of the social and industrial infrastructure. Even around the fringe of the netwrk. where operating ratios of 3001 were not unccmmn. there ins also a lack of political w i l l to grasp the nettle of such was the sensitivity of the issue. I f it were reduce the call on the public purse without drastic would suit the irmediate needs both of the Government i mnagement. The basic approach was t o give B.R. a strong busi ess orientation. The problem was tackled a t the level of instituti a1 behaviour. Forces w r e set in motion to change the whole cult re. It was not a painless process. A final factor. without which no real progress could have been d d e . was the availability within B.R. of some high calibre managers who vere able t o respund t o this lead. Organisation change structure and amny able people vere set in effect 'now shw us what you can dom. the appropriate human resources to carry it out. I 5. DESCRIPTIONS OF ACtIOBS TAKEN THE OVERALL PROGUME OF ACTION I I The prime objective of the overall p r o g r u u of action wasl to reverse the deteriorating railway financial performance. The mepod chosen was that of a radical managerial intervention which was a a t the fundamental culture of the organisation. The Ihang$% structure was one means towards the end of achieving true bus ess orientation for B.R. I THE OBJECTIVES OF TEE PARTIES I I The objectives of the Government were t o reduce the f i n a n i a l burdens on the taxpayer and the railway contribution t o the pu$lic sector borrowing requirement. They vanted t o introduce more s lf- reliance in railway mnrgement and realism in the workforce. a ose f in effect of Thatcherism. The Govenment also wanted to set c financial targets for the public sector and hold them account for results.  The Board knew that the Government probably wanted to retain the passenger railvay reasonably close t o i t s present size because/ of the political sensitivity of closures. The Serpell Comnittee had considered various system size options and there were clear thrqats to the future, unless the financial burden could be rsduced by mrslaganenr action. I I I I welcmaed the n w financial objectives and freedom to get on qith the job. It vas felt vithin B.R. that the objectives *re achievable (in fact they were B.R.'s own five year targets bro f o m r d by tvo years) and that success or failure would be meas in ten- of achieving them. II I From the very first. commitment towards that target was total. I signalled his position early: the central theme was thnt t h e railway should become more self sufficient . The less dependent an industry is on any source other than the paying customer, the dore efficiently it v i l l run. The vay t o prosper in any business ia/ to satisfy the customers by giving value for money. I I I TBS PROCESSES OF ACTION $:: The process through vhich the plan of action developed vere inte rather than external. No fresh legislation came into effect. was no public participation in a grand debate. A t the inter w i t h Government relationships quietly improved. No longer was seeking overly t o influence Government transport policy. The central fact vas that now the Government gave B.R. clear finandial '3 objectives in 1962 and had sufficieut confidence in the Boar get on with it. No additional resources vere provided. Indeed the changes were accompanied by an overall net reduction in 4.l. management and administration. I I Bowever. the Government made additional money available to fund t h e redundancy costs of the transition, and facilitated the inves*nt which was one of the approaches to cost reduction. I I I ORGANISATION CHANGE I I The f i r s t step vas a development of an organisational change d i c h had been set up in 1982. Up until 1982 the main focus of t h e railway organisation below board level had been the dive geographical Regions (the Eastern Region. London tfidland ~ e ~ d o n . Scottish Region. Southern Region and Western Regior.) . Until 4984 regions were 3-tier entities (except Scotland) which hadl an intermediate Divisional level between Regional Headquarters and Area Managers i n the field. Areas are the ground level units for dach of the four production functions (operations, mechanicaq 5 electrical engineering. signal L telecoaanunications engineeringand civil engineering).  I Until 1982 Railway management war organised functionally w i t h q the Regional structurer. A t Regional level marketing managers coulp be .found for pasrenger. freight and parcels traffics: spenping . departments were represented by the four production funct ons (above) and there were the urual rervice departments. f 4 cI e personnel and pluming. I A rimilar structure exirted a t B.R. Board HQ level and functibnal managers in the Region8 had 'dotted line' responsibilitd on standards and procedures. but not for direct control. I Control of receipts and expenditure was based upon the traffic convention'. Receipts were accrued a t the orig whole. I Below the Chief Executive rerponribility for costr and receipts was divided. Some progrerr h ~ dbran made t o create Passenger and Freight service profit centres but a t a 'contribution' level. since l? no mechanism existed of allocating track. signalling and a i- stration costs. The a l l w t i o n of track and signalling cost t o the Freight and Parcels borinerses as a whole was based an avoidable costing convention. There was a 'hierarchy of aqkda- bility' which meant that nan-pasrengsr businesses were charged ith i. the incremental costr only. on the premise that the railways existed primarily t o run a passenger buuiners. ~ In 1982 five mbottomlinemmanngerr were appointed. They were kibown as Sector Directors. There are the Director Intercity. the DireIctor Network South East. the Dinctor Provincial. the Director Fre~ight and the Director Parcelr. fhe introduction of Sector ~ana~emendwas c!esigned t o spea--head the cultural change from a largely produc ion- ti led organisation t o one which i r business-led. This has been achieved by disaggregating the 'bottom line' responsibility and focussing attention on the profit and loss situation rather receipts and costs in isolation. The supported grants) railway consists of Network South East. currently. Intercity. The rum-supported railway and Parcels. The subdivision of the Passenger business was based upon the generally recognised patterns of train services (and, there profit centres) where certain services were clearly Intercity. senred the London and South East commuters and the balance considered t o be mprovincialmin thnt they were concerned commuting in the provinces and secondary cross country and senrices.  "re=' I n establishing the five Sectors. it war determined that. t o the policy direction of the Board. the Sector Directors mu d bet 'in chargemand responsible f o r the development and implement ti on^ of strategies t o achieve agreed financial and quality of seyice! objectives. I I It vas recognised that m y of the rerourcer could not be uni identified t o each Sector. Conrequently, the Reg~onalGe i Mnagerr, through their Functional Hanagerr, were made respon ible! for the 'delivery' of required changer a s vell a r the day-t -day running of the railvay. We Functional Director8 w r e requir d t o a c t in an advisory capacity, particularly in rerpect of profess onal. standards and the developent of acrosr the Board cost s vine; initiatives. Below the Sectors. sub-sector managers fvers established v i t h bottom l i n e responsibility for a number of col~lnodityo r service groups. ~ . 1n:erCity has eight rub-rectorr covering four rov:e~, cross c o h t r y services, the Gatvick-London exprerr , Anglia m d charter t r j i n s each v i t h its own manager; Provincial har four sub-rectorr on4 for each Region except the Southern: Network South Eart has s k sub- sectors reflecting geographical service groupri Parcels ha4 two rub-sectors. reflecting its business rtructure: m d freight has f o u r product-based rub-rectors plus newly formed Railfrjight Distribution. ~ REVISED RESPONSIBILITIES w a g e r s reporting t o Regional -gars. But the resources used and the level of costs t o be incurred are dete by the business managers. This introducer contractual* el$:: into the relationship between business managerr m d the geograp4ical. managers. a s shown in the diagram b e l w t I  OR!3HISATIONAL RELATIONSHIPS . - --------------- . sector ,4 'I Dlttctots I t I A I 1 I I I I - 1 Sub-sector Busine~s Functional ! Relationships: -- Coawnd Contractual M v t ~ 3 ---- Regional production managers are required t o deliver the spe fied quality of service a t the cost specified by the business man ,ers. Significant improvements were made in the Corporate Planning stem t o accoamnodate Sector objectives. strategies. and performance als. The planning system has both 'top-dm' and 'bottom-up' proc ses. It ensures that action plans are produced in support of Rai Plan intentions. Individual managers are expected t o deliver com .tted and monitorable action plaas.  With the introduction of Sector Uanagement, the Board continued to set the broad policies under which B.R. operates. Within these policies the Sector Directors develop and define their strategies. The plans of the five sectors are co-ordinated by myself and :he Board. They are implemented by the Regional Gengral Managers, using resources under the technical guidance of the fScti~ona1directors. Uanagement Information Systems (HIS) were developed t o support the new structure. Infrastructure costs were allocated to the prime business sector with other sectors operating on the margins being charged the additional costs that they inccrre~d. Erperience has enabled fine tuning of the system to provide a v4ry effective method of identifying the real cost of nmnfr;g groups pf srarvices. There i s no doubt that it enabled real savings to be q d e in a l l areas of hfrastructure as the real cost of retaining *rgdaal facilities has emerged. I f m organisation is attempting a deep culturai change it is not znough t o introduce business orientation into the managerial structure. Somehow the understanding and loyalty of the vhole workfor.-- has to be engaged. Alongside the sictol: revolution a system wide 'cuutomer f i r s t ' campaign was launched. In time most staff will have passed through a specially designed training ,:rograme. Ir. t i a l priority i s being given to fkont line customer contact staff. In parallel with this there was u/ider;rread adoption of the tern briefing approach to direct colnwurication with the workforce. By making sure that a21 staff knew what was going on. how the business was going. and vhy the c u s t d e r was important. management laid a grounding of understanding which made it less likely that militancy would thrive on ignorance. Since 1983 the railway investment scene in the UK b s been transformed. The Government was alvaya nnxious ' lemonstrate the ..uant. trade off between f?.nancial performance and in\ b y of the assets were a t the end of their useful IL. and business managers were able to produce sound investment schemes. This was helped by a new set of Investment regulations vhich required a proper examination of options and an independent finaslcial appraisal. A l l investment schemes have t o be sponsored by a business manager vho will be very much aware of the effect on h i s bottom line. Betveen 1983 and 1987 B.R. was able to invest L4010min the renewal of the railway. the highest level for 25 years. L65Om has been spent on track and signals. L30Om on new diesel and electric trains. and main i .ae coaches. L26Om on new and refurbished stations. B.S. now plans t o spend more than L3.000m a t 1987188 prices over the next five years: LllOOm on n w locomotive coaches md diesel units. LlOOOm on infrastructure. LSOOm on stations and the f i r s t L30Om of the planned LSOOm investment in the Ckannel Tunnel.  Another element of the overall programm i s the dribe for service qualitp. With the narrower role of the Regions came {he realisation that it warn the job of the production functions abovela11 to deliver rervicer of acceptable quality a t agreed costs. ( A range of h w a t i o a r were adopted in purr~litof this goal, including the 1 appointmant of a Director. Quality. rupported by ~ u a j i t yLeaderr in *he Sector8 and Punctionr. I I Antrmg the healthy rim8 which emerged a8 a resuit of the new buninerr focur war that the invertatent pro~osalswere ,given much more careful rcrutiny by their burinesr sponsors. hi a result they reprerented better value for money and investment scqeme costs have b been brought down. An early ruccerr for rector man8 ement was the re-allocation of some high speed train rets from 1 es vhere the production thinking had placed them t o other8 vherq tho businesr advaatage was greater. I I 1 Aaother helpful ractor war the continuing trend towar 8 pkivatising different fringe ~ c t i v i t i o r(BT Hotels, Sealink. B r i ish Transport Adwrtiring and BrJrirh P ~ i Engineering Ltd). l This(left nunagere t o concentrate on the ruccerr of the core business. $imilarly when 4 product developmmt. rather rhur derign rpecificati n. was taking place within the organiratioa. it tended t o r -inforce the engineering ethos. I The changes involved are fully inrtituti-lised in reflect new rtructures, rcles. rerpoasibilities. ryetanu. Political compromise did not play a the inrtitutioml refozm. The actions fitted both of the Government .ad round when the three year support by 252 war achieved in 1986187. 6. RIPACT OF OTHER CWGES I The -in iatpact of other changes relates t o things badpening in the brr,rder environment and in the mrket place, I I In the United U p d o . the transport market has =banged. Car ovnership has grown t o the point where over 21 mLllioslJ vehicles are licensed. Since 1979 38 tonne lorries have been authdrised. Entry t o markets i s easier with coach and bus deregulation Modern jet aircraft operate the internal dcmestic routes in rha m. b s t British Airways Shuttle flights are nou operated by 757s. Competiti m i s getting tougher. I I . The social. induntrial and political c l h t e of the( UK has been another factor, Since the defeat of the 1384 miner4 st1:ike. the industrial relatior.3 climate bas been cbracteriseq by the nev realism. Tough minded management i s more likely t o e progreer vhen militancy i s fir recession, although it i s beg id!?g 1:o appear  h that Uargaret Thatcher brought a new relationrhip w i t the unions. a t least in tixrt8s of high unesployment. I Finally, the underlying financial climate has belen ,generally - favourable since 1984 vith buoyancy in the passe4ger markets. particularly in the prosperous South East where London1 house prices have risen d m t i c a l l y and forced many people t o opt f)or long range commrting. Although there are danger signs that the e~onamyi s now overheating it i s too early to anticipat, what effect phis may have on B.R. I 1 I 7. EVALUATION OF RESULTS 1 I I I It vill be several more years before A f i ~ assesaneng c m be made l of the turn around in B.R.*s fortunesr but on an i n t e r 9 evaluation the results arm highly encouraging. There has a bees (deep and irreversible shift in the attitudes vithin railmy mmagement. B.R. has undergone A major change uid become A business-led. productivity-minded orgadsation. I I Campared with 1981. the r a i l business i s operating uitt( over 30.000 fewer staff (22X reduction) 2.824 less locorrrotives (29P reduction) 4.284 fewer coaches (23Z reduction) and 59.443 less frpight vagons (671 reduction). In the current Bail Plan 2.000 seprrate aetion plans have bear identified t o effect further hprwcrmbnt over the next five years. I I Since the Govenrmt set f h c i a l objectives in 1983.) the call on the public purse has been reduced by 27X in real te*. British Rail is n w the most productive and cost-effective) railway in I remain a p i l l a r of this cost effective railway. I I  WHERE THE PROGlU-W WAS UNREALISTICALLY OPTIHISTIC ~ I I 1989 and 198617. This was a major achievement. ver. it i s proper in the interests of a balanced qualifying cam-nts. The underlying trends in the recession. 8ad in one senre the true t e s t may be on I Tho progr- also delivered the 198617 financial targe s by a route ! slightly different from the planned route. Productivi y gains were marginally down but offset by an 'oil price bo us' and a 'maintenance holiday', so t o that extent the huge su cesres were helped a l i t t l e by a gratuitous benefit and by the defe eat of non- esrential mf intenance. 1 B.R. have lrarrud froa t h r i r experience of vorking towadds the f i r s t s e t of objectives and the lessons w i l l be applied t o tackling the second s e t of objectives. I I organisation t o be folloved by responsibilities. This gave rise t o some conflicts of interest betwren burinrss and production. I management processes. \ As Chairman. I have been quite happy with t h i s 'creati e tensionw, which conferred a net benefit. but lover down the orgsai atiun there were 'winners and losers' and quite high levels of jealously, resentment and in-fighting. Sometimes it seemed tha corporate teawork would become one of the casualties. and even s nior people sometimes needed reminding that the real enemies were their competitors not the* colleagues. . I Hanagrrs emergcd fram this period much more aggressive (and tougher minded than they had necessary process t o confront the r e a l i t i e e  b o t h e r v i m vould be that the change process could havb been better managed. The basic proposition appeared to be 'set the1 tigers loose and see what happens'. Some of the early efforts were directed towards sectors 'playing the allocations game' a d &tempting to pass costs off t o other sectors. Hanagers had t o clfmb(the learning curve. There i s no sudden 'flip over' into business madagernent, but a sustained period of development. I I CHANGING EXPECTATIONS AND PERFORMANCE The key t o success vas managaent motivation. Hany ( individuals flourished in the n w climate and made personal contribrjtiws of tbe 7 highestorder. Itwasdemonstrated thathighperfo ceiandhigh aspirations go together. The existence of indi-idua management objectives (some formalised within the p e r f o ~ c erev ew process, others created within the budgetary control system created a pattern of sustained motivation. Hundreds of manager th~coughout 1 the system had t o come to terms with the business ethos. A few f e l l by the wayside. but the vast majority made the trans tion. For those who did not themselves becme business managers this meant they had t o adjust t o a ccmpletely new pattern of r e l a t i nships, and often accomnodate changes in their own role. The n w r lationships were contractual rather than hierarchical. I 9 For many people, such as Area Hanagers, there was a n network of accountability by vhich they had to cope w i t h different emands from  - ADDITIONAL MEASURES The inmediate need is to consolidate on the gains alr4ady made and a encourage the emerging business skills to develop. Uqderrtandably the initial business thrust was directed towards cost~cuteing. It is n w important that even greater weight is given to winning new businer8 in the market place. There are encouragj,ng signs of innovative marketing initiatives now emerging. I With another demanding set of Government financial and quality objectives on the horizon there are clear signs that tthe mn up to privatisation of our transformed industry will be as c$allsnging ae the last six years.