Tuesday, 16 September 2014

Should We Renationalise the British Railways? That's Not the Right Question

Let me start with a surprising statement: the Department for Transport (DfT) now exerts far more control on the British railways than they ever have before. And yet, the railways are more "privatised" than they have been since the start of the First World War. Welcome to the confusing, contradictory world of Britain's rail industry.

British Rail was privatised in 1994, and ever since there have been calls to renationalise it. But the biggest change wasn't that the railway network was privatised; the biggest change was that it was fragmented, broken down into literally dozens of separate companies all ostensibly trying to work together to provide a unified National Rail network, all the while each trying to extract their own little margin of profit.

What this means is there isn't a "British Rail PLC" that can simply be renationalised, but rather a whole multitude of companies which would need to be recombined were we to try and renationalise the railways.

What are these companies? In a nutshell, the privatised railway can be explained as follows: one company owns the tracks, three more companies own the trains, and about 20 other companies run the passenger services. In theory, they all work together to move passengers around, but are also in competition with each other...

How did we end up with this mess? To answer that we must turn to politics. In 1992, the Conservative Party included in their election manifesto that they'd privatise the railways if they won the election. To the surprise of everyone, they won, and then had to make good on that election promise. In 1993, the blueprint was laid out for privatisation: although ostensibly designed to generate competition between the different sectors, the cynic in me wants to believe that the government knew they'd probably lose the next election (they did), and thus set about privatising the railway in a way that couldn't ever be undone. (Nonetheless, I am reminded of the aphorism: "never assume malice when stupidity will suffice".)

The tracks, points, signals and stations were sold off to Railtrack. Railtrack were a profitable company, listed on the London Stock Exchange and part of the FTSE 100 index. But after a litany of accidents, including Hatfield and Potters Bar, Railtrack's assets and operations were transferred to the state-controlled not-for-profit company Network Rail in 2002.

Meanwhile, the trains were sold off to three rolling-stock holding companies (ROSCOs): Angel, Eversholt and Porterbrook. Between them, these three companies own practically all the trains, locomotives and carriages used on the British railway network, being leased back to the companies that operate them. In other words, all the trains that used to belong to British Rail were sold off, and about 11% of the ticket price you pay goes to leasing them back from the ROSCOs! And, unlike Network Rail, the ROSCOs are very definitely private companies and all make a tidy profit.

Most importantly, though, privatisation created 25 train operating companies (TOCs): each part of the country was carved off into a separate franchise, and each was awarded separately to be run by a private company. Each franchise controls the drivers, guards and other operating staff, and is responsible for running the day-to-day service with rolling stock leased from the ROSCOs. Minimum numbers of services per day are specified (usually quite tightly) in the franchise agreement, ensuring that passengers are provided with the service they expect.

One of the aims of privatisation in this form was competition: different companies should "compete" for passengers, driving down prices while improving quality. But that doesn't really work on a railway network with limited capacity, and with a complicated interwoven timetable. In many cases there's more than one company on each line - for example, both Virgin Trains and London Midland operate services on the West Coast Main Line out of London Euston to Watford, Milton Keynes, Rugby, Birmingham and beyond - but there are only a limited number of trains that can be run.

So how do they decide who gets priority? The short answer is that Network Rail does. Each TOC bids for "paths", much like air-traffic control slots, to run a train at a particular time, and then Network Rail decides which paths can go to which operators, and effectively the actual timetable is written, as a whole, by Network Rail. In cases of dispute, things can get referred to the Office of Rail Regulation; sometimes the dispute is resolved by the DfT specifying the exact timetable. This means that the DfT can specify exactly how much competition they want (often none at all).

Perhaps the most laughable way in which this fragmentation manifests itself is when trains inevitably get delayed. If London Midland say to Virgin, "Oi! You delayed our train!", it's not really good enough if Virgin just mumble "Sorry...". No, this is a commercial railway where London Midland must be compensated for the delay caused by Virgin. As a result, Network Rail employ hundreds of train delay attribution clerks, whose entire job is to monitor delays to trains and attribute every minute of delay to a specific cause, and thus determine who pays the compensation. (Operators get compensated when a train is delayed by just 3 minutes; sadly they have to be delayed by 30 minutes for them to pass such compensation on to the passengers.)

That basic structure has been with us now for 20 years, since privatisation took effect on April 1st 1994. There are a lot more details - such as all the subcontractors employed to clean the trains, run the catering services, upgrade the tracks, design the signalling systems - and I'm ignoring freight trains and open-access operators, but you get the picture: the railways no longer function as one, but rather as a myriad of separate companies.

In a small number of cases, that's led to a dramatic improvement in services, particularly with CrossCountry Trains, the long-distance services such as Bournemouth-Manchester and Plymouth-Edinburgh which avoid London and instead pass through Birmingham New Street. Under British Rail, CrossCountry was always the Cinderella of the network, passed from pillar to post with no investment to speak of for decades; with CrossCountry as a separate franchise, Virgin were able to dramatically improve the service. Although, it is now a victim of its own success and the trains are too short, and no-one wants to subsidise lengthening the trains...

And there lies the rub: subsidy. Ever since the then-Transport Secretary Barbara Castle decided in 1968 that some lines could remain open even though they would require permanent subsidy from the Treasury to operate them, all political parties have accepted the principle that the railways should be subsidised by the government. Even as privatisation was enacted, it was accepted that the franchises would, in many cases, require government subsidy to operate; conversely, some of the more lucrative franchises (principally long-distance inter-city operators like Virgin and GNER/East Coast) were required to pay premiums back to the Treasury. This ensured that the principle of cross-subsidisation - where lucrative services propped up loss-making ones - continued as it had done for years.

Of course, when it was all one British Rail, there was no profit to be made; every penny of subsidy went towards improving punctuality and upgrading services. But with the railway fragmented into lots of pieces, allocating subsidy is all of a sudden a trickier job. Previously the job of dishing out money to individual regions or services was the job of the British Railways Board, which operated at arms' length from the DfT, much like today's Network Rail. But without the BR Board, that function is instead fulfilled by the Department for Transport itself.

In other words, the DfT is now the one deciding that, for example, Manchester Piccadilly gets two extra platforms and freight trains to Southampton should be electrified, and that reopening the line between Lewes and Uckfield will have to wait. Network Rail can have their own say on small-scale track improvements, but for anything large-scale or anything involving a significant timetable change, it's the DfT's decision. Even under BR, the DfT didn't have this much control in the day-to-day running of the railway.

Yet, conversely, with dozens of companies involved in running the railways, all trying to extract a profit, the railway is nearly as privatised as it was in the days of Stephenson and Brunel. And while privatisation usually makes things more efficient and reduces costs, in this case the fragmentation has meant that costs spiralled massively, to guarantee each of the companies involved a share of the profit.

Where does this profit come from? Government subsidy (at least in part). Whereas subsidy to British Rail only rose above £1 billion per annum in 1991 (and even that was partly due to the recession at the time), in 2006-07 the total subsidy to Network Rail and the TOCs stood at a whopping £6.3 billion. To be fair, that's come back down to about £4 billion per annum as at 2012. (More figures here.) Nonetheless, what that means is that subsidy to the railways today is about three or four times what it was when it was nationalised; even adjusting for inflation, subsidy has at least doubled in real terms since privatisation.

The reasons for that are not at all clear, and nor is the solution. While some of that subsidy is due to the fragmentation of the industry, some of it may be due to the boom in passengers: passenger numbers troughed at about 700 million in 1995, but have since climbed to over 1.4 billion in 2012. As a result, the railways are carrying more passengers per year than it has since before the Second World War, and moving more people costs more money. Some of the increase in subsidy is also down to long-overdue maintenance; British Rail postponed a lot of maintenance (often even simple things like replacing worn-out track), and Network Rail is having to work overtime to clear the backlog.

It's also important to remember that, in spite (or perhaps in some cases because) of the fragmentation, the railway network has improved immeasurably in the last 20 years. The West Coast Main Line now gets 125mph trains every three minutes, and it takes less than an hour to get from Coventry to London (though the upgrade did cost £9 billion). And as my recent posts have shown, we're currently in the throes of one of the biggest programmes of upgrades to the railway network in decades, with Crossrail, the Thameslink Programme, Great Western electrification, the Northern Hub and the Electric Spine. Those upgrades don't come cheap.

On September 1st 2014, Network Rail was reclassified as a public sector body, meaning that its debt (some £34 billion) counted towards the national debt for the first time since privatisation. That debt is an inevitable side effect of wanting investment now but wanting to pay later; railway investment is a pretty safe bet, because there will always be lots of passengers to move, and if you can move them more efficiently then so much the better. (Incidentally, one of the few reasons the debt was kept off the public sector books was that Gordon Brown didn't want to breach his rule that the national debt should not exceed 40% of GDP, though that went out the window in the financial crash of 2008.)

In practice, this means very little else; the DfT will continue to exert the same control over Network Rail as they have done for years, and Network Rail will continue to ask for more money for improvements. It will probably mean that the salaries of the big bosses at Network Rail will have to fall in line with public sector limits (current chief executive Mark Carne receives an annual salary of £675,000), but the day-to-day running of the railway will change very little.

Does it perhaps signify a change in ethos at the Department for Transport, a desire to move towards a renationalised railway? I don't think so, or at least not under the current government. Indeed, the current government is trying to get East Coast, which was temporarily renationalised when the franchise held by National Express went bust, back into the private sector by the next election.

The Labour Party, however, have suggested that a state not-for-profit firm (such as that which currently runs East Coast) should be allowed to bid for franchises when they come up for renewal. Personally I think that's just making a dog's breakfast of a railway network even worse by trying to partially renationalise bits by the back door: it's not clear that partial renationalisation is actually better, since then you might have not-for-profit companies trying to compete with the likes of Virgin Trains, and that isn't likely to end well (for anyone).

Ultimately, no government since John Major's has had the guts to take any fundamental policy decisions with respect to the structure of the railway network; they've tinkered at the edges, but the railway is still basically that given to us in 1994 at the time of privatisation. A full renationalisation might bring costs down and thus enable more investment in the infrastructure for the same level of subsidy. But even British Rail struggled to find the right structure for the railways: they tried organising it by region, but in the 1980s moved to "sectorisation", where InterCity, Network SouthEast and Regional Railways were all subordinate only to the top management, without regions to get in the way.

Ever present in British Rail, though, was the knowledge that the tracks cannot be maintained without knowing what trains have run over them, and trains cannot be maintained without knowing where they've been. Perhaps the oddest thing about privatisation is that it has separated track from train, with virtually no "vertical integration" of tracks and trains for nearly 20 years. In recognition of that, South West Trains are experimenting with a "deep alliance" with Network Rail's Wessex Route: since 2012 the track and trains on the lines out of Waterloo have been brought into one management structure, for the first time since the days of British Rail.

But that won't work everywhere: even within the Wessex Route there are other trains run by CrossCountry, Southern and First Great Western, as well as a multitude of freight trains serving the port of Southampton. Try and make a vertically integrated railway around Birmingham or Manchester and you're in for a world of trouble, such is the number of different operators in the area. Indeed, the success of CrossCountry is precisely because there isn't vertical integration. Sadly, there isn't an easy one-size-fits-all solution, as British Rail found.

Let me be clear: on this occasion I don't want to try and argue either for or against renationalisation. My point is that renationalisation would require reintegration of the myriad companies that were created at privatisation, and that would bring about a complete restructuring of the railway. In other words, renationalisation is not something to be undertaken without a lot of thought put into the structure of any renationalised railway and - more importantly - how we get there.

Putting the railway network back together could be done: it would probably require the state buying out the train operating franchises (or letting them expire), getting the trains back into public ownership, and instituting a management structure more like British Rail. But that kind of shake-up would require more political will than I think any government is likely to want to expend on railways: unlike privatisation, which was achieved within a single parliament by a partisan government, reintegration and renationalisation might require a commitment over one or more decades to see it through.

For all its faults, the privatised railway has presided over one of the biggest booms in passenger use in history. After 20 years of getting used to a whole new structure, the rail industry has found its feet again, and a huge programme of upgrades, new lines and electrification is underway, with £30 billion being spent over the next five years or so to dramatically improve the railways in a way not seen for generations. Would that investment have come under British Rail? Possibly. But when the current structure has given rise to that much investment, it's hard to argue that now is the time for a fundamental shake-up of the railway industry.

There is undoubtedly scope to improve the organisation of the railways, but I think it's best achieved by the typical chant of the Englishman:
"What do we want? Gradual change! When do we want it? In due course!"
Whatever happens, though, I sincerely hope that it's not driven by blind ideology with no regard for the structure of the industry. Full-scale renationalisation rammed through without a plan for how to reintegrate the railways would be no better than John Major's privatisation. And until someone comes up with a detailed plan for how to renationalise the railways, the question of whether or not we should renationalise them is impossible to answer.


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  2. Hi Dave,

    British Rail was awful and almost unusable at times (e.g. London to Manchester where the BA Super Shuttle was a popular and superior alternative.). The treatment of Railtrack (an improvement on BR - but not the finished article) was a disgrace, costing lives, progress on modernisation and leading to higher fares. Renationalisation would be utterly pointless and only lead to further privatisation thirty or so years later after a deterioration in services. It would also be a complete waste of money - which could be better spent.


    Robin (BBD)

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