The end of the line for rail privatisation?

In the face of the pandemic, the government has accepted that the franchise rail system is irretrievably broken. It could be the track to renationalisation.

Southeastern £25 million
Southeastern £25 million shortfall. Photo by David Wilson on Flickr (CC BY 2.0)

The rail operator, Southeastern, which covers Kent, East Sussex and various other lines, has been stripped of its franchise over concerns that some £25 million of taxpayer funding that should have been returned was not.

This is described as a “serious” breach of the franchise agreement under which the company operated the lines. Southeastern’s owner, the stock market listed company Go-Ahead, accepts that “errors have been made in relation to the franchise” and the £25 million has been repaid.

It remains to be seen if all this falls foul of the section of the 1968 Theft Act that relates to fraud. Corporate wrong-doing is seldom, in my experience, punished too rigorously. The rules that have governed the financing of the rail network are hideously complicated, with consequences I will lay out in due course. Not many of them good for the traveller.

Southeast franchise has been renationalised

The southeast franchise has effectively been renationalised and will be taken over by the government’s operator of last resort, which is already running other franchises in the UK. Except that, by some measures, the various corporate entities that replaced British Rail are already being heavily funded by the state and are, ipso facto, under public ownership. Renationalisation by another name, then?

I always say, half-jokingly, that I owe my career to Mrs Thatcher which is ironic given how many people can say the exact opposite. When she was elected in 1979, she set about privatising huge chunks of British industry then owned by the state.

Great British sell-off

She decided to sell shares in British Gas, British Telecom, the water industry and electricity for less than they were worth to the general public. This would create a nation of private shareholders who would, it was thought, never elect Labour again because their shares would then be renationalised and taken away from them.

At one stage in the 1990s there were reckoned to be about 12.5 million private investors, almost all in those privatised utilities, slightly more than there were members of trade unions. The City became enormously sexy. (There was even a soap opera, Capital City, featuring some individuals significantly weirder than those I ever came across as a financial journalist. And I knew some real weirdos.)

The stock market debuts of companies such as Sock Shop and Tie Rack were often the lead items on the evening TV news. And as those millions of novice shareholders wanted to read about their investments, the financial pages of the national press geared up to meet this new demand. I was one of the beneficiaries.

Privatisation brought efficiency

It could be argued that those privatisations were also good for the consumer. They brought market forces to bear, providing management with a reason to operate the businesses more efficiently and introducing competition. British Gas and British Telecom, in state hands, were notoriously inefficient.

So too was British Rail. In 1993 the Railways Act, introduced by the government of John Major, paved the way for its privatisation. It was, in my view and I was there watching it unfold, A Privatisation Too Far.

Gas, Telecom and the regional water and electricity companies were already largely discrete and free-standing entities, with existing management in place to run the show. The rail industry was interconnected. You could not sell off this or that business as a regional operator because they overlapped. If you run trains out of London and the southeast, say, you inevitably at some stage enter the territory, and the rails, of another operator.

Railtrack

So the industry was privatised in three parts. Railtrack had the rails and the larger stations. There were three companies created to own the rolling stock – I never really grasped why – which were called in the jargon ROSCOs. These were sold at a small fraction of their true worth, because such an asset had never existed before and no one knew how to value them. Several subsequently changed hands for a great deal more than they were initially sold for.

The actual running of the trains was the job of the train operating companies, or TOCs, who leased the rolling stock from the ROSCOs. Because it was impossible to recreate the old regional businesses that had originally come together to make up British Rail, the authorities created a franchise system. Companies would bid in to run the various regional networks, using the lines owned by Railtrack.

There were two massive unforeseen consequences of all this.

One, if there was a problem, each side could blame the other. The poor passenger waiting on Platform 2 for the cancelled 09:15 into Liverpool Street would never know who was to blame, Railtrack or the train company.

Two, to tempt the operators into the franchises the punishments for failure were set too low. The business plans of those who bid to run the railways required a slight percentage increase in the numbers of passengers every year. Rail runs on very tight margins even without any state support.

Passenger numbers flatlined

Static passenger numbers made those business models unworkable. The rate of increase in passenger journeys duly flatlined by the middle of the last decade, fuelled by technology allowing more working from home and rail fares rising well ahead of inflation.

Various operators got into financial difficulties and walked away. Meanwhile Railtrack had itself gone bust in 2001, after the Hatfield rail crash, and was renationalised as Network Rail.

Because the operators worked on a “Get paid as you go” model, bringing in fares as they went along, there was no real penalty for walking away. The only sanctions against Network Rail for its failings were fines by the rail regulator. As it was state owned, this is the equivalent of punching yourself in the face. Nonetheless, fines were duly levied.

By the later years of the last decade, as many as five of the main operators were probably unviable, it was reckoned in the industry. Then came the pandemic.

Greater Anglia

According to the most recent report and accounts from Greater Anglia, passenger revenue collapsed last year from £754 million to less than £269 million. The Government chipped in £345 million of emergency aid, as agreed, under the so-called Emergency Measures Agreement, because of the pandemic, and at the earnings before interest and tax line, before one-offs, profits actually rose from £12.1 million in 2019 to £32.9 million.

Renationalising British Rail
Renationalising British Rail? Photo by Chris Morgan on georgraphy.org (CC BY 2.0)

From a shareholder perspective, that is attractive enough. Greater Anglia is one of five UK franchises operated by Abellio, which is the Dutch state-owned transport operator. The franchise should run for another four years – except that it probably won’t.

No one believes passenger numbers will ever increase to their pre-pandemic levels, when they were, as I have pointed out, still running below what several operators needed to break even. That “emergency measures” state subsidy, over and above what the state may already have chipped in, will be needed for the appreciable future.

UK taxpayers subsidising European state-owned companies

Greater Anglia is not the only UK franchise holder to have links with a foreign government. It raises the obvious question. Should we pay the Dutch government, or an arm thereof, to run part of our railways? Or could we perhaps cut out the middleman and do the job ourselves?

The rail industry is already, de facto, in UK government hands. Last September, in the face of the pandemic, the government accepted that the system was irretrievably broken and announced the planned end of the franchise system. Some believe its replacement, moving operators onto transitional contracts and paying them a management fee, will not be much different from what we have seen since privatisation, a state subsidy that allows private operators to make a profit.

Nothing wrong with that. But it is not clear what will follow this transitional period. If the track is owned by the state and private operators are paid a fee to run the trains, how much of the rail industry is actually within the private sector?

Renationalisation by stealth

It is an interesting philosophical point. Have we achieved renationalisation by stealth, courtesy of the pandemic?

I suspect there is a strong chance than in a few years’ time the railways will again be owned outright by the state. The only question is, what should we call this new body? British Rail has a nice ring to it, even if, for some of us, it brings back some grim memories.

Can you help us reach more readers?