From the TUC

McNulty report: Ignoring the elephant in the room while barking up the wrong tree

19 May 2011, by in Economics

Apologies for the mixed animal metaphors but both apply particularly well to Sir Roy McNulty’s report on value for money in the UK rail industry, published today.

Given the scale of the public subsidy and the painfully high fares inflicted on passengers, the review offered a great opportunity to address the long standing problems within the privatised rail industry.

It is disappointing that this opportunity has been squandered. 

All the evidence points to inefficiency and waste brought about by a complex and fragmented system of multiple operators, contractual relationships leading to unnecessarily high transaction costs and public money leaking out into train operators’ profits and shareholder dividends.

McNulty’s remedies?  Further fragmentation, greater “commercial freedom” for operators and a predictable, though misdirected, attack on rail workers’ pay and conditions.

The TUC and rail unions are united in their condemnation of the report’s recommendations, issuing this joint statement today.

The most disappointing, and yet unsurprising, aspect is the complete failure to seriously consider the benefits of a national integrated rail system under public ownership.  Here we come to the elephant in the room that McNulty, Secretary of State Philip Hammond and, let’s face it, successive Labour and Conservative governments have tried their best to ignore.  Historical comparisons with British Rail and benchmarking against European networks clearly demonstrate that integrated, state run systems are more efficient.   But this option remains off the table.  Talk of avoiding large scale structural change masks an ideological blind spot to the benefits of public ownership.

Perhaps more alarming is the attack on rail workers pay and conditions.

In his interim report of December 2010, Sir Roy McNulty made the claim that “a large increase in staff costs” was one of the “principle drivers of the increase in taxpayer support”.  We challenged him on this.  There is no correlation between the big spike in taxpayer subsidy from 2002 and rail industry pay, which for most rail workers has remained close to RPI inflation in that period.  In a letter to the TUC earlier this month, Sir Roy admitted his mistake, stating that “the correlation, which the Interim Submission suggested, would not appear in the final report”.

This has not, however, prevented the report from identifying “excessive wage drift” caused by “weaknesses in HR/IR management” as a key factor in cost increases.  And the report has made a number of recommendations directly attacking workers’ pay and conditions, including:

  • Driver only operation to be the “default position for all services on the GB rail network”
  • “Changes to ticket office opening hours and staffing”
  • “A review of station staffing as a matter of priority”
  • Reviewing the “salaries and employment terms for new entrants to the industry”
  • Reversal of the “trend to reduce continually the length of the working day and the working week”
  • An end to “the expectation that salaries, at all levels, will increase ahead of inflation”

The extent to which the Government and, more importantly, the train operating companies take up this agenda of job cuts, closures and pay freezes will remain to be seen.  But noises in the press suggest that the Government are more than sympathetic to McNulty’s recommendations in this area.  What’s more, there’s many in Conservative ranks, including the Mayor of London, who might well see this as the start of a campaign against the rail unions themselves.

Is this focus on staff costs warranted?

Our own research, informed by TAS Business Monitor, IDS, ASHE and LFS data, indicates that while the rail wage bill has increased by 50% since privatisation, average earnings and unit wage cost increases have not been particularly excessive when compared with the national average.  What’s more rail industry pay has advance largely in line with rail workers’ productivity.

Pay settlements in the rail industry since 1994 have been fairly consistently higher than RPI inflation and median settlements for the whole economy.  This is not surprising given the use of long term pay settlements usually negotiated along ‘inflation-plus’ formulae.

However, rail industry median earnings have not risen dramatically more than those of the UK economy as a whole, as table 1 suggests below suggests:

Table 1:  Median earnings increase 1997 – 2006
Rail industry 44%
Whole economy 39%

Source:  Incomes Data Services

The table below shows that it is clear that privatisation of rail did not lead to significant reductions in staff or labour costs for train operating companies.  However, TOC unit labour costs have risen at a lower rate than those for the UK economy as a whole.  Furthermore, real revenue per staff member has increased by 56.3% indicating that productivity has increased at a greater rate than both unit labour costs and the total wage bill over this period.  If we took a different measure of productivity, say volume of passengers, then we find that train passenger kms increased by around 50% since 1996/97, again corresponding closely to wage increases.

Table 2:  All TOCs:  % increases from 1996/97 – 2008/09
Wage Bill 52.2%
Total employed 13.6%
Unit labour cost – TOCs 35.3%
Unit labour cost – Whole Economy 38.0%
Productivity 56.3%

Source:  TAS Business Monitor:  Rail Industry Performance 2010 and ONS Labour Force Survey Unit Wage Costs data

Earnings data from ASHE suggests that rail industry pay is not excessive and that most workers in the industry earn less than the median earnings for all employees, when hours of work are taken into account.

Median annual earnings Total hours worked per week Overtime per week Basic hourly rate (excluding over time)
All Employees £26,510 33.4 1.1 £14.65
Train Drivers £41,176 37.8 2.5 £21.15
Rail Transport Operatives £33,790 41.4 5.8 £14.10
Rail Construction and Maintenance Operatives £29,200 39.8 3.6 £12.40
Rail Travel Assistants £27,158 40.1 4.6 £13.29

Source:  ASHE 2010

Cutting staff numbers will likely prove to be counter-productive.  Research by Passenger Focus and others demonstrates time and again that the travelling public value station and ticket staff.  Passengers faced with unstaffed ticket barriers, ticket machines and empty platforms suffer frustration and fear.  Is this the customer experience that will attract increasing punters on to the trains?  Unlikely.

So it would seem that, in many ways, McNulty’s recommendations on rail industry pay and conditions are wide of the mark and will fail to solve the fundamental cost push factors that are really driving the rise in fares and public subsidy.

What might these be?

Well, that would be a whole new article.  But from their research, the RMT calculates that a combination of high borrowing costs, transaction costs through numerous interfaces and dividend payments to shareholders mean that rail privatisation is costing the tax payer up to £1 billion a year.