Rail Privatisation- a strategic failure

A guest post from Ian Bailey who has been a labour activist since 1995 and has campaigned in places all around the country. This post and many others can be seen on his new blog here.

A story in The Guardian today reporting on the 5.9% average fares increase going into effect today begs the question – what do we do with the Railways. To anyone but the most rabid Tory its clear that privatisation has been a disaster – subsidy quintupled vs BR days, and fares rising beyond the point where they actually cause economic problems.

In order to propose a solution, first we need to understand the problem, and that means a quick analysis of privatisation. The concept was fairly simple – create numerous free markets where competition would increase quality and drive down prices. Lets look at how they got on:

1. Competition for customers
And when I say customers I do of course mean passengers, but we’re not allowed to call them that any more. So, competition between operators. In most cases there is no competition. One franchise operates all the trains in most areas leaving the punter no choice at all. And in the odd case where there is competition, rules were introduced to remove it – for example the “Moderation of Competition” rules which prohibited other operators going head to head with Virgin West Coast. This banned Wrexham and Shropshire from stopping in Birmingham, and played a reasonable part in that operator going under earlier this year.

The lack of competition has created private fiefdoms where the operator can basically do what they like – which is where the regulator comes in. This mandates controls on certain regulated fares, service patterns on particular routes and stations etc. Increasingly as the years have passed since privatisation more and more of what the operator does is dictated directly by the department for transport – an acceptance by both government and the industry that there are no market forces at play with most operators.

2. Competition for Rolling Stock
All of the passenger rolling stock was handed at a favourable rate to three new companies:
– Angel Trains, which has been owned by Japanese investment bank Nomura and failed casino bank the Royal Bank of Scotland and is now owned by the multinational infrastructure company Babcock and Brown
– Porterbrook Leasing. As with Angel this has done the rounds – management buy-out, then Abbey (bank), then Santander, and is now owned by Deutche Bank, Lloyds Banking Group and BNP Paribas.
– Eversholt Leasing. Owned for much of its time by HSBC, now owned by a consortium that includes 3i’s, Morgan Stanley, and STAR Capital Partners (of Hong Kong)

If you want an idea as to how favourable the terms of sale were, Eversholt was privatised for £518m in February 1996 to a management team who sold it exactly 12 months later for £726m.

As to why they were split this way it remains a mystery. An asset value was assigned to rolling stock and the train operators would lease the trains. This raises several problems – many of the assets being valued had long since been written down, with the ROSCO able to charge a lot of cash for a very old asset. And if there was supposed to be competition for rolling stock, this hasn’t just failed, it never started.

Any free market requires spare capacity, and between them the stock companies have reduced the number of vehicles down at every possible opportunity. Nor did we ever have the possibility of interoperability for the vast majority of the trains held on their books. Many of our trains do a specific job for a specific route and can’t just be rented to another operator. And in most cases where new trains have been ordered, the franchise has to have the permission of the government who is paying for the trains anyway.

Time after time a franchise shows a business case for x number of vehicles and is told by the government its getting less. The best example of this is the total fleet replacement on what then was Virgin Cross Country. Their winning bid to run the franchise pledged to replace all the trains with new Voyager units. Problem here is that despite doubling the frequency of services run (i.e. from hourly to half hourly), the trains were so short that two of the new trains had fewer seats than one of the old seats. And the business case predicted 25% more journeys thanks to the improved frequency (and in reality it was 40% more!) – so more passengers fighting for fewer seats with fares set significantly higher to pay for the “improvements”.

3. Competition for Franchises
What most members of the public consider to be privatised actually isn’t – the service operator. Train Operating Companies operate services on a franchise basis – once their franchise ends the ownership reverts back to the state. Usually it is handed straight over to a different company to operate, but in the case of the London Metro part of Silverlink trains (which became London Overground) and National Express East Coast (who were stripped of their franchise) the ownership has remained with the government and hasn’t been re-let.

In every case the idea was that privatisation would bring in enterprising private sector managers who would cut costs – franchises are set up so that they receive decreasing subsidies from the government during their term and pay increasing premiums to the government. They are let on a highest bidder basis to whichever bidder offers to manage the service levels stipulated by the contract at the lowest subsidy / highest premium.

At least thats the theory. Very few of the expected premiums have ever been paid – either the cost of doing business is so big that the franchisee expires before paying anything out (i.e. Virgin West Coast who went bust thanks to the fiasco known as Railtrack – more later), or the contract is so badly written that having received all of the subsidy at the beginning of the contract, the operator can hand it back before the premiums get too big (as First Great Western have announced is their intention).

Indeed the cost of operating most franchises is massively higher than under British Rail, despite massively higher fares and costs cut to the bone. Why is this? Well franchises have to pay out rolling stock leasing costs, track access charges, fines if a delay is attributed to them (and an army of managers to manage responsibility for these) and so on. As well as each one having its own separate management team, HR, marketing, ticketing etc etc.

4. Competition for Maintenance
The most deadly element of privatisation was the creation of a free market in maintenance. Railtrack PLC was created to own all of the track, signals, bridges etc, and it proceeded to let out all its maintenance contracts at the cheapest possible cost. Not only that, it also implemented oversight of the industry so lax that after a series of poor-maintenance crashes it had to impose blanket 20mph speed restrictions as it admitted that it had no idea what state the rails were actually in. But the good news for shareholders was that it did a great job doing the important bits – selling off land and building shops at stations.

Railtrack bankrupted itself with the West Coast route modernisation. This would deliver 140mph running for £2m by 2005 it claimed. Except that Railtrack didn’t have a clue, signed a watertight contract with Virgin Trains (who in turn won the franchise with a business case based on delivery of huge operating premiums to government), and went bust when it all went wrong. West Coast eventually cost over £8bn to deliver 125mph running in 2008.

Its successor is Network Rail, completely publicly owned with most maintenance work done in house.

Policy proposal
Its quite simple really. We have a rail industry that serves no-one well apart from the banks that own it. When they took power the government commissioned a report to ask why it is that our railways cost such vast amounts compared to European competitors whilst delivering so little. The report managed to skirt around the main culprit – PROFIT. We still have a massively fragmented industry with a myriad of contractors locked into multiple contracts. This complexity adds so much cost that we have taken what at the time was the only profitable main line rail passenger operation in the world (INTERCITY), massively increased fares for passengers and increased the number of passengers in some cases by 40%, and yet have an industry that costs the taxpayer 5 times more.

Each and every cog in this operation makes a profit. The franchise running a loss-making commuter railway at huge subsidy levels takes a profit. As do all their contractors and sub-contractors. As do the lawyers, accountants and administrators who manage the web of contracts. As do the banks offering clapped out rolling stock sold to them at a fraction of their value for a significant premium. If you want to cut the costs for the taxpayer and passenger, we need to remove this unwanted complexity.

So here is my proposal:
1. Upon the termination of each franchise, don’t re-let it. Every major thing the operator does is already directed by government – how many trains to run to where how often, what vehicles to use of what type in which volume, how much to charge passengers for all the important tickets. For many of the franchises we pay out a lot of cash in profit for them and their contractors for the privilege of very little benefit. Cut all of these leeches off and run the services directly

2. Use this saving in subsidy to remove the complexity in ticketing. Despite the laughably called “simplification” of fares last year ticketing remains a nightmare for most passengers. Many of the rules are illogical (advance tickets that fine you many multiples of their value for getting off a stop too early) and have rules that seem designed to penalise passengers. Nor do many of the fares make sense – you can save a lot of money splitting tickets.

For example, an anytime return from Thornaby here in the north east to London costs an incomprehensible £295. If I buy an anytime return to York for £36.90, and an anytime return from York to London for £249, I’d save £13. To travel on the same trains making the same journey at the same time. This level of complexity costs money – cut it out, offer ticketing based more on journey length and for less money. Having travelled on these peak hour services on business, they are rarely loaded above half full – the ludicrous fares price people off them.

3. Hire the best managers. Amongst the dross there are some genuinely brilliant management teams out there – for example the Chiltern Railways team. Why does expiry of the franchise have to means expiry of their skills – hire them!

4. Abolish stock leasing. Tell the Rolling Stock Companies that their assets will no longer be rented upon expiry of the franchise. The government needs trains, the banks need someone to use their trains. They cannot lease them to a foreign operator so will be forced to sell them back to the government. I suggest that we pay the price they were sold for plus inflation for the older trains, or the construction cost plus inflation for the newer trains. Better still we build some new trains (to give people jobs) and then tell the banks where the scrapyard is.

It seems simple really. The railways are a strategic national asset. They are critical to the functioning of our economy and are currently offering poor service for a price that neither government nor passenger can afford. A Labour pledge to end rail nationalisation over the lifetime of the next parliament will be a vote winner – saves the taxpayer money, saves the passenger money, and stops the banks from further asset-stripping.

If anyone wishes to have their blogpost featured on the Redblog, please simply email it to theredblog@live.co.uk


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