Getting back on track: an alternative to private railways

There is a growing consensus that rail privatisation has failed, but an alternative doesn’t have to mean a new centralised bureaucracy, writes Paul Salveson
October 2013

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The British experiment with rail privatisation has failed. It has not delivered lower costs or better services. Instead the total cost of running Britain’s railways has spiralled – it costs about three times as much to run them now as it did under British Rail. It isn’t just the rail unions that are saying enough is enough; rail passengers and transport professionals are questioning the future viability of a privatised system.

We have a rail network that costs far too much to run and is expensive to use. Short-termism, private profit and control by a remote and increasingly demoralised civil service have been a very bad combination. In a highly professional management and workforce it is increasingly difficult to find anyone, from senior management downwards, who thinks the current system is right. They know they could do so much better if the shackles of privatisation were removed.

So what’s the alternative? The option of going back to the old BR has its attractions. Some aspects of running a railway need a strong degree of central control. But there are downsides. Britain is a very different place than in it was 1993 when the Railways Act was passed. Scotland, and to an extent Wales and also Merseyside, have a strong degree of control over their own rail networks. Northern local authorities are looking to get the sort of control over local and regional services that Scotland now enjoys. Devolution has delivered for rail, with investment in electrification, new trains and line re-openings.

Taking back the power that Scotland, Wales and – soon – the north have over their ‘domestic’ rail services would be a huge backwards step. A centralised, state-owned railway would be a Treasury-controlled railway and this seldom did BR any favours. The most successful operations in the past 20 years have been relatively small, tight-knit franchises such as Merseyrail, Chiltern, Scotrail, London Overground and TransPennine, where management has a clear focus on their business and – in most cases – a degree of long-term stability in the franchise. There is also a close and broadly positive relationship with the public body managing the franchise, in many cases a devolved authority (Merseytravel, the Scottish Government and Transport for London).

There are other options. Let’s start with infrastructure, which is owned and managed by Network Rail, a not-for-dividend company established during the last Labour government in the wake of Railtrack’s collapse. It is developing a stable, dynamic programme of investment in the railway infrastructure and the last thing it needs is another radical structural change. It needs to be more accountable and play a strong part in developing a long-term vision for rail.

The key changes should be in the delivery of passenger services and rolling stock provision. The vast majority of passenger services are delivered through franchising, which has done little more than add to the costs of running trains and inject major instability into the system. Following the west coast main line fiasco (a term now used by virtually everyone in the industry) the government has shunted the programme of re‑franchising back by as much as four years. Any new government after the 2015 election would need to do nothing more than take each franchise back into the public sector when it comes up for renewal, at no extra cost to the taxpayer.

For the ‘regional’ franchises such as Northern Rail and TransPennine Express, responsibility for managing a combined network should be given to the emerging ‘Rail in the North’ group of local authorities. They should have the power to create an arms-length, not-for-profit operation or contract its operation to a social enterprise. That would give the right level of strategic management of regional services, not controlled by unaccountable civil servants in London. In the case of InterCity, where there is clearly a need for a UK-wide approach, the structure is already there, in the form of Directly Operated Railways (DOR). This is the state-owned body currently operating East Coast, which the government is now rushing to privatise.

The government would need to do nothing more than take each franchise back into the public sector when it comes up for renewal, at no extra cost to the taxpayer

DOR was set up by the government as the ‘operator of last resort’ in the case of a franchise going bust. However, it has the expertise to develop into an ‘InterCity UK’ business operating a re-unified intercity network, bringing each InterCity franchise (West Coast, East Coast, parts of Great Western and Greater Anglia, Cross Country) into a single body as franchises expire. It should have strong and inclusive governance with representation from the Scottish and Welsh governments, passenger and employee interests.

A major cost under privatisation has been rolling stock. Most trains are now owned by the banks, which have extorted a huge rate of profit from leasing them to train operators. The government needs to place a cap on rolling stock leasing company profits (which currently can be as high as 50 per cent) or set up new, not-for-profit companies to own trains. There should be incentives to operators to own their own fleets, if the short-termism and instability of franchising comes to an end.

This approach could be delivered without major upheaval and at no extra cost. It would provide a structure in which the proceeds from the growth in passenger numbers could be reinvested to make a better railway for everyone.

Paul Salveson’s book Railpolitik: bringing railways back to communities is published by Lawrence and Wishart


Making rail pay

Rail companies’ profits depend on huge public subsidies, writes Andrew Bowman

As Paul Salveson makes clear, there are many compelling reasons to consider alternatives to the privatised railway system. But there is one fundamental problem that these alternatives must confront: the railways don’t make money. A hugely capital intensive industry, which delivers broad economic and social benefits, is supposed to pay its way from fares and can’t.

Under the privatised rail system, as the recent report The Great Train Robbery (available free from the Centre for Research on Socio-Cultural Change) demonstrates, a grand accounting fiddle conjures the illusion of private profits through a series of huge direct and hidden state subsidies.

Loss-making, low-population density regional franchises frequently receive around half their revenue as state subsidy. Even for the apparently successful franchise of Virgin’s West Coast Mainline, £2.5 billion of direct state subsidy was required to allow the company to take away £500 million in dividends between 1997 and 2012 and present itself as a profitable private enterprise.

But most important for this simulacrum of capitalism is the hidden subsidy delivered through Network Rail, the infrastructure company. Through a ballooning of state-guaranteed debt to about £30 billion, train companies have enjoyed both upgraded infrastructure and reduced track access charges, which have fallen in real terms from £3.2 billion in 1994 to £1.6 billion today. Without such a generous landlord, we would have no private rail system.

Dismantle this set-up and return it to a form of public ownership, and it will become, once again, a ‘loss making industry’ and ‘burden on the taxpayer’. It will become an easy and obvious target for cuts, leading to the same spiral of underinvestment that afflicted British Rail.

At present, fares make up 65 per cent of the revenue needed by the railways each year. A £10 billion funding gap is plugged by £4 billion of direct cash subsidy and £6 billion of public liability via Network Rail. At best estimates, stripping out the inefficiencies created by the complex private system would save £1.2 billion per year – less than it costs simply to service Network Rail’s debt.

Ultimately, any alternative to privatisation, particularly on a regional level, may live or die on finding a new funding mechanism to tap the diffuse social benefits that rail creates. These include the rises in property values and the advantages to businesses whose operations are smoothed by good transport connections. The south east’s Crossrail scheme, for example, is estimated to be worth £5.5 billion in terms of increased property values within one kilometre of the route. Find a way to tap this sort of unearned increment that the railways deliver and the alternatives may have a chance.






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