Rail Privatisation Rolls On

Professor Prem Sikka, Lord Sikka writes:

The UK government has been trumpeting that it is going to nationalise the railways as privatisation has yielded huge costs but no benefits. Well, it isn’t going to nationalise the entire railway system. At best, that description only applies to passenger services. Its version of public ownership does not apply to ‘open access’ rail system, or freight, and there is a silence on the lucrative operations of the rolling stock companies (ROSCOs). Is the government being pragmatic or just unwilling to upset its corporate friends?

Privatisation of Railways

The privatisation of the railways and everything else began with a right-wing coup in the late 1970s. One of its major aims has been to restructure the state and make it a guarantor of corporate profits. Conservative Prime Minister Margaret Thatcher considered railways to be a very messy candidate for privatisation and told a cabinet minister that “Railway privatisation will be the Waterloo of this government. Never mention the railways to me again.” There were concerns that profit-chasing private companies would not make sufficient investment in signal, tracks, platforms, staff and infrastructure, and as monopolies they would short change the public. Sir John Major, Prime Minister from 1990 to 1997, had no such qualms and wanted his name etched in the annals of privatisation.

The Railways Act 1993 laid the groundwork for privatisation of British Rail by separating the responsibility for the railway’s infrastructure and its train services. At the time British Rail was one of the most efficient in Europe, one of the cheapest per mile in Europe, had a punctuality rate of 86.4%, and was receiving annual subsidies of around £1.7bn. The government promised that privatisation would improve efficiency and punctuality, reduce fares and subsidies. In pursuit of ideological objectives integration of the railway system was sacrificed. To foster competition British Rail was split into over 100 separate private companies, including Railtrack; 25 train operating companies; three rolling stock leasing companies; five freight operators; and 19 maintenance suppliers. Private companies became responsible for buying and leasing rolling stock, operating passenger and freight services and managing the infrastructure. Most of the changes came into effect in April 1994. The fragmentation increased administrative duplication and operating costs. Following devolution, varying degrees of train services are devolved to Northern Ireland, Scotland and Wales administrations.

Failures of Privatisation

A number of train crashes, most notably the Hatfield train crash in October 2000, showed that rail infrastructure lacked investment and was poorly managed. In 2001, Railtrack went into administration and in 2002 its assets were transferred to Network Rail, a publicly-owned company controlled by the state. It became responsible for infrastructure, setting timetable, capacities, planning, operating network and managing performance. In 2004, the Office of Rail and Road (ORR) became responsible for regulating health and safety standards, competition and consumer rights issues.

There are currently 14 national passenger train operators in England. They essentially receive a contract or a franchise for a fixed period from the government to operate trains on particular routes. They do not own the infrastructure. Trains are leased from third parties. Competition is minimal and non-existent on busy commuter routes. With over 100 companies, the system is fragmented. Over the years, the number of private operators has declined and four routes are now operated directly by a state-owned “operator of last resort”, which usually takes over when the operators fail or decline a contract.

Since privatisation rail companies have made considerable profits, so much so that Avanti West Coast mangers described subsidies as “free money” and performance-related payments as “too good to be true”. Train operating companies, mostly owned from abroad, make about £400m a year in profit. They have become almost entirely reliant upon the state. For 2022-23 the operational rail industry had income of £22.7bn, which included £11.9bn from the public purse, £9.2bn from passengers and £1.5bn from other sources.

Most of the promised benefits of privatisation have not materialised. The existence of short-term contracts means that the long-term is neglected. There is little innovation and productivity has declined. In the quarter to 30 June 2024, train companies delivered punctuality of 70.1% (the percentage of recorded station stops arrived at ‘on time’ (early or less than one minute after the scheduled time)). Though train fares are notoriously difficult to compare, England’s train fares are often one of the most expensive in Europe. In the 10 years to 2023, rail industry received subsidy of £75.2bn and it was reliant upon the state for its profits.

Renationalisation

Against a background of rising fares and subsidies, and poor services, the clamour for bringing railways back into public ownership increased. Indeed, at least four of the 14 train operators are already being run by the government as an “operator of last resort”. Infrastructure is already in public ownership through Network Rail.

The Labour government is largely following the last Conservative government’s blueprint with a two-stage plan for public ownership of railways. The first is to bring passenger train services into public ownership. The second-stage is to create Great British Railways (GBR), a state-owned company to oversee rail transport in Great Britain. It will take over the franchises of current operating companies.

The Passenger Railway Services (Public Ownership) Bill, currently going through parliament, deals with the first stage (see above). The Bill prohibits the Secretary of State from extending existing rail franchises or entering into new franchise agreements, apart from in specific limited circumstances. It removes the presumption in favour of franchised railway passenger services being provided by a private operator. Instead these would be provided by a public sector company under a public sector contract.

The passenger services will be brought into public ownership as and when franchises expire. Thus, no compensation for nationalisation is payable. What about the franchises which do not expire within the current parliament i.e. by 2029? In fact, all contracts have clauses that can be triggered so that they expire by 2029. Services can also be brought into public ownership if the current operator breaches contracts or wishes to terminate the contract.

The government claims that renationalisation would create an integrated rail system, eliminate much of the duplication resulting from operations of over 100 companies, and would save some £2.2bn a year.

The Bill does not apply to open access rail operators. They run small services under a contract but assume all revenue risk for operating services. Freight is also excluded from the present Bill though it may be subject to a separate Bill in the future.

The legislation for creating the Great British Railways (GBR) is expected early next year.

Rolling Stock Companies

The government’s raison d’être for renationalisation is “the failure of privatisation to deliver reliable and affordable services for passengers. It also makes financial sense, saving tens of millions of pounds each year in private sector fees. That money can now be reinvested in the railways. Running the railways in the interest of passengers and taxpayers, not to the benefit of shareholders, also makes operational sense”. Yet its nationalisation plan excludes the lucrative rolling stock companies (ROSCOs).

In 1993 the government created three rolling stock companies – Angel Trains, Eversholt and Porterbrook. Some 11,000 items of British Rail rolling stock were handed to ROSCOs and sold to private owners at below the market price. ROSCOs don’t manufacture or maintain stock though they specify requirements. They lease out rolling stock (engines, wagons, carriages, etc.) to operating companies. Rolling stock typically has economic life of 25-30 years but train operating companies operate on a horizon of 5-10 years. Therefore, leases are short-term and expensive. ROSCOs can lease out the same asset again and again for high profits. The cost of leasing is passed to customers and taxpayers.

Today the three ROSCOs control around 87% of the market and own about 15,200 vehicles. The companies are foreign-owned and registered in Luxembourg. ROSCOs paid dividends of £409.7m in 2022-23 and had a profit margin of 41.6%. The cumulative dividend is around £2bn (£2.7bn between 2012 and 2020) in the last decade. The dividend is typically 100% of the pre-tax profits and escapes taxation in the UK.

The government can eliminate ROSCOs altogether and purchase rolling stock direct from manufacturers, or it can create its own leasing company and eliminate the current ROSCOs from the supply chain. It has not been forthcoming with any explanation.

To sum up, contrary to newspaper headlines the entire rail system is not being renationalised. Only most of the passenger services are. Lucrative freight and rolling stock companies are excluded, which means that private sector will continue to make profits out of publicly funded infrastructure.