As the general election nears, the major parties are starting to set out their vision for Great Britain’s railways. The Conservative manifesto will appear later this week. Think-tanks associated with the sillier end of the party have lobbied for Network Rail to be privatised, which would be a disaster, so it’s worth keeping a look out.
As we’ve covered before, this covers a lot of ground. Network Rail, which owns the tracks, operates maintenance and signalling, manages new-build projects, and allocates and manages train paths, has been in the public sector since 2002, and under the direct control of the Department for Transport (DfT) since 2014.
The manifesto clarifies Labour’s line with the phrase “as franchises expire”. This implies it’s talking about train operating companies (TOCs), like Chiltern or Northern Rail. These are contracted by the DfT to run passenger train services: every few years there is a bidding auction to see who’ll pay the biggest premium for the right to operate trains on a given route.
The winning bidder must meet a service specification agreed with the DfT, pay track charges to Network Rail, lease the trains that are needed to operate the service, and pay staff. In exchange, it gets to set and collect fares on the route, subject to price caps laid down by the DfT, and to keep whatever’s left once it’s paid everyone else.
So if Labour wins a majority in next month’s election, then when franchises start expiring, they will be delivered in-house. There is a model for this, which has been successful on a small scale: the DfT has a subsidiary called Directly Operated Railways, which takes over from a franchisee if they go bust. When National Express East Coast went bust in 2009, DOR took the franchise and provided a good service. Although it fell short of the premiums NXEC had originally pledged to pay, it returned £235m in profit to the DfT in its final year of operation.
There are, however, two problems seeking to apply this small-scale success to Labour’s plans. One is simple scalability. When East Coast was benchmarked against private operators, it was very clear to everyone involved what a good job consisted of. But if the entire business is nationalised, there’s no obvious way to determine whether the public operator is providing good value for money, and not much incentive for it to do so.
There are structures that maintain benchmarking and competition under government control. The most obvious is in London, where TfL sets all aspects of the service and takes all the profit/loss risk, but ensures value for money by contracting out some operations. The same could be done by devolved regional governments (which would also enhance local accountability), and directly by the DfT for long distance and regional services.
This isn’t what’s happening, though. Labour’s pledge that the new operator “will be built on the platform of Network Rail” sounds more like an attempt to recreate the monolithic structure of British Rail. This is, at best, untested in the modern era.
The second problem with Labour’s manifesto version of nationalisation is the side promises being made. Explicit pledges include “ending the expansion of driver only operation” and “freezing fares”.
The first of these is a bad idea. Driver-only operation is a proven safe way of reducing costs without inconveniencing passengers, already used on 30 per cent of the network. The pledge has been modified from an earlier leaked draft which suggested DOO should be abolished altogether, but refusing to expand it takes away an opportunity to cut costs, with no benefit to passengers.
The second helps passengers more, but it’ll be expensive. Regulated train fares rise in line with inflation at about 2 per cent a year (1.8 per cent or 2.3 per cent, depending on whose methodology you use). With farebox revenue of £9.4bn, that’s an extra £200m a year to find in year 1, and £400m in year 2. After five years, there’ll be a £1bn/year gap compared to currently planned rises. And regulated fares are mainly used on already-full commuter trains, so there won’t be much volume growth to make up it.
Will abolishing TOCs pay for this? Annual TOC profits distributed to shareholders are £200m per year. So if the scale issues can be solved and the new model works as well as East Coast, then the savings in the first year will pay for the fares freeze. Hooray!
But this is a one-off gain: in the second year, we’ll need to find another £200m to pay for that year’s fare freeze. By year five, there’ll be a £800m/year revenue gap. AAnd we won’t be able to save money on guards to make up for it.
Overall, Labour’s rail plans are less terrifying and damaging than some of the options the Conservatives are contemplating – and there’s certainly nothing wrong with moving away from the TOC model in itself.
But the devil is in the detail, and the details here suggest that Labour’s plans are more focused on quid-pro-quos for the unions and cash bungs for commuters, than on the actual reason you might want to move away from the TOC model: the core job of shifting more people and freight onto the railways as efficiently and safely as possible.