Northern Ireland Railways Company Limited: A report on the provision of rail services in Northern Ireland

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Summary

Background

This reference under section 11 of the Competition Act 1980 concerns the efficiency and costs of, and service provided by, Northern Ireland Railways Company Ltd (NIR). The full terms of reference are contained in Appendix 1.1.

In this chapter we discuss the main issues arising from our inquiry. A summary of our recommendations appears at the end of the report in Chapter 10.

NIR was incorporated in 1967 as the first subsidiary company of Northern Ireland Transport Holding Company (NITHC) for the purpose of providing rail passenger and freight services. All `movable' and specialised equipment required for operational purposes (including rolling stock, plant and signalling equipment) previously belonging to the Ulster Transport Authority was transferred to NIR. Ownership of `immovable' property was retained by NITHC, but that required to operate rail services was leased at no cost to the railway company. NIR's assets have a book value of around £56 million and the company's annual turnover is around £16 million. Commercial receipts fall short of expenditure and in the year ended April 1990 the Government contributed around £11.5 million by way of subsidy.

Performance

NIR is running a small business with a disjointed network. It faces four major challenges. First, it has to maintain and, with due economy, modernise a railway showing signs of earlier neglect and heavily dependent on subsidy; secondly, it has a long-established complex pay system and union bargaining arrangements cross-linked to those of British Rail, which are inappropriate to a company of its size; thirdly, there is sharp bus and car competition on all its routes and this has intensified on its longer routes; finally, it has to contend with a high level of civil disorder which has eroded its passenger base.

Considerable investment has been devoted in the last five years to mordernising the signalling system, suburban stations and level crossings and to relaying track with consequential manpower reductions. Further reductions in maintenance costs may be expected. NIR has pushed vigorously for three major investments to rectify some of the inherent deficiencies in the network. These are: the Cross Harbour Link in Belfast between York Road and Central Stations, the building of a new station nearer the centre of Belfast at Great Victoria Street and the upgrading of the BelfastDublin line. These projects have been variously studied by NIR, NIR's external consultants, and consultants acting on behalf of the Department of the Environment (Northern Ireland) (DoE(NI)). The timing of this kind of capital expenditure is very much in the hands of DoE(NI) given its responsibility for overall transportation policy in Northern Ireland; so far it has approved the Cross Harbour Link. NIR has also recently proposed major improvements to shorten the route between Belfast and Londonderry. For the distant future, there are thoughts of some suburban electrification associated with a Belfast light rail system. In the field of capital investment NIR has been active and forward looking, but the basic network maintenance shows signs of insufficient attention. Its track relaying programme has fallen behind, resulting in speed restrictions which detract from its efforts to market its services. We also note that its important decision to refurbish rather than replace rolling stock was taken without a formal appraisal (see paragraph 1.14).

NIR has identified, as a prime objective, breaking the staff pay link with British Rail and replacing it with a pay and bargaining system more appropriate to the scale and needs of NIR's operations. However, the planning, preparation and resources needed to make a radical and beneficial change to long-established practices appear to have been seriously underestimated. We accordingly recommend that a new post of Human Resources Manager should be created to assist in the implementation of some specific measures which will enable NIR to make more effective use of its manpower.

There is no complacency in NIR regarding the competitive threat. With advice from external consultants, which took into account the competition posed by bus and car, a new organisation was set up in 1987. The passenger and freight activities were organised into three business sectors, InterCity, Suburban and Freight, in order to focus on fares, marketing and service. However, sectorisation has resulted in an unnecessarily complex organisation for a small railway network. There is an unduly large central office management and an expensive information system to service it. At the same time, the accounts and plans do not give sufficient emphasis to cost trends and cost management for a company experiencing sharp competition. We recommend that passenger sectorisation should be abandoned (see paragraph 1.12).

Both management and staff have coped remarkably well with the dangers and frustrations caused by terrorism and hooliganism. Incidents peaked in the year to March 1990, during which services were disrupted on no fewer than 172 days. Communications systems have been put into place to safeguard passengers and staff. Marketing efforts have been intensified to retain and win back passengers.

The reference questions

We have been asked three general questions: whether in supplying services NIR could improve its efficiency and thereby reduce its costs and call on public expenditure without affecting the quality of service provided; whether the quality of service provided could be improved without any increase in costs; and the extent to which a higher quality of service might generate higher net revenue. We believe there is some scope for improving efficiency and reducing costs without affecting service. Savings should be achievable by simplifying the management structure and by changing work practices. Reliability of service could be improved by terminating the lease of three three-car units to Irish Rail and the loss of rent offset by savings in unscheduled maintenance. Speed restrictions imposed by poor track conditions could be removed and timekeeping improved by better programmed and supervised track maintenance. There are a number of investment proposals designed to make travel by rail more attractive to existing and potential passengers by reducing journey times and improving the travelling environment (see paragraph 1.5). Whilst these proposals may increase NIR's gross revenue by increasing the number of train travellers their justification depends heavily on community cost/benefit considerations.

In addition to these general questions, our terms of reference ask us to report on a number of particular subjects. Our responses are as follows.

Scope for improvements in the efficient use of manpower

While there is scope for more efficient use of manpower, this will be achievable only by a thorough review of existing work practices, well prepared cases for discussion and negotiation with unions, proper manpower planning and good personnel documentation. An improved climate between management and unions would encourage achievement in this area. NIR's human resource management will need to be strengthened if the potential savings are to be fully realised (see paragraph 1.6).

Appropriateness of management structure and sectorisation

We found a considerable overlap between the activities of NIR's managers and the non-executive Board, with the latter tending, in practice, to see itself as a part-time higher executive. We propose a change in reporting relationships and Board composition which is designed to clarify accountability and simplify reporting. It gives greater prominence to NIR's senior executives but still allows the Chief Executive to benefit from the experience of directors from outside the rail community. We explained in paragraph 1.7 why we regarded passenger sectorisation as inappropriate for NIR's passenger activity. However, we see merit in leaving the Freight sector as a separate operation for a trial period.

Use and maintenance of operational assets

Rolling stock has been insufficient to meet the timetable and provide for scheduled maintenance, but the position should be improved by NIR's decision to repossess the units leased to Irish Rail (see paragraph 1.9). Maintenance facilities are old and inconvenient and a crucial decision on the future of rolling stock maintenance will have to be taken in the next year or two. Equipment used for maintaining the track is now being revamped and replaced and there should be a resultant improvement in track maintenance, which now shows signs of neglect. Signalling and stations are all being modernised and refurbished.

Investment

NIR's investment programme appears for the most part to have been well formulated (see paragraph 1.5). We have, however, suggested changes in procedure which should lead to appraisal of an item before it is included in the plan and to the setting of priorities. We have reservations about NIR's decision to postpone some suburban rolling stock replacement until such time as a decision is reached on electrification of the BelfastBangor line, which may be associated with a Belfast light rail system. The commercial wisdom of this postponement in favour of refurbishment is questionable in the absence of formal appraisal and bearing in mind the policy of fleet upgrading being followed by Ulsterbus Ltd (Ulsterbus).

Fares and matching services to demand

NIR sets its fares at what it believes the market will bear, and for most journeys at a premium over the equivalent bus fares. It has been, and still is, actively experimenting with promotional fares to increase revenue from spare capacity on off-peak services, and is studying whether additional passengers from areas not served by the railway could be attracted by bus feeder services. There is, however, some scope for improvement through more systematic market research, which should enable NIR to equate its fares structure more closely to what the market will bear and to match supply more closely to demand.

Aptness of management information

The present information system is designed primarily to service the business sectors. Improvements to the system now in hand should provide top management readily with costs by type of expenditure, and this is an essential step. Performance indicators related to cost are being discussed between NIR and NITHC. With the changes in organisation we recommend (see paragraph 1.7) there will be scope to simplify the management accounting system.

Freight, property, ancillary services and concessions

NIR has contracts to provide freight services to Irish Rail and dock services to Sealink, activities which make a useful contribution to general overheads. It has also developed a thriving parcels business. There has been much dialogue and activity over the years involving NIR and NITHC to ensure that the development potential of operational land is realised, and future contributions from this source are not likely to be of any magnitude. NIR has also actively pursued income from advertising and concessions, but the prospects of any sizeable income being generated are poor.

The role of NITHC

One other matter arising from our inquiry is in our view particularly important. For whatever reason, NITHC has not in the past assumed the full role of a holding company charged by statute with the holding and management of the assets and undertaking of NIR. This has left a vacuum in the control and monitoring of NIR's activities which it has been difficult adequately to fill. We therefore welcome recent moves by NITHC to assume its full role. It has taken steps to strengthen its professional expertise and we believe that this should be further strengthened by the appointment of an adviser with senior management experience of a transport undertaking.

Priorities for action

There are three matters which we believe should have priority:

(a) improvement of the management structure by changes in reporting relationships and Board composition;

(b) abandonment of passenger sectorisation; and

(c) strengthening of NIR's human resource management.

The recommendations which require particular attention in these areas have been set out in bold type in Chapter 10.

We have pointed to areas where NIR's performance can be improved, but we have also found a management team dedicated to and ambitious for the future of the railway in Northern Ireland. They and their staff have shown remarkable resilience in maintaining services despite the severe difficulties they have experienced in recent times.

We are required to consider whether, in relation to any matter falling within our terms of reference, NIR is pursuing a course of conduct which operates against the public interest. We conclude that NIR is not doing so.

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