Labour has pledged to nationalise Britain’s railways, more than 20 years after the Conservatives sold them off to the private sector.
Opinion polls have repeatedly shown strong support for the idea.
FactCheck took a look into the details.
How would it work?
Lots of the infrastructure is already publicly owned by Network Rail, which operates under the Department for Transport. So nationalisation plans only concern the train operating companies themselves, such as CrossCountry and Virgin Trains.
But, under Labour’s plans, these companies would not need to be bought up. They operate under franchises, which come to a natural end anyway.
The only problem is, each franchise is set to expire at a different point, over several years. A few would still not have expired by the end of the next parliament.
What’s wrong with private companies?
Nothing, according to the government. But critics accuse private firms of ratcheting up train fares and profiting from commuters.
Business competition between railway companies is different to many sectors. As a customer, you generally have little choice which train service you use. The main competition element is simply the initial fight to win franchises from the government.
Parliament’s Transport Committee recently warned this system was “no longer fit for purpose” and was leading to increased ticket fares and poor performance. “It has not yielded all the competitive benefits initially envisaged by the Government in the early 1990s,” it said.
The committee suggested a shake-up in the way train operators compete. But critics say it’s natural for profit-making companies to place shareholder interests above customer interests. What’s more, some argue that it’s unfair for private investors to profit from the unavoidable costs of commuting. A nationalised system would have more incentive to drive down fares and improve the service, they say.
How about the finances?
In 2015/16, franchised train companies brought in a combined income of £12.4bn, mostly from ticket fares.
Company profits vary, but it can be a lucrative business. To get a snapshot of this, FactCheck looked at the latest financial accounts of 17 of the main train companies that run normal passenger services. Together they made an annual operating profit of £343m – an average of £20m per company.
They also paid themselves very handsomely. Our analysis showed that the top director for each company was paid an average of nearly £300,000, including pension and perks. One of them earned £478,000 – almost 17 times the UK median wage.
All together, the highest paid directors for each of the 17 companies FactCheck looked at made a combined total of around £5m. Eight of the companies also paid out £185m in dividends to shareholders.
However, despite the resources of private companies, the rail system has always depended on huge amounts of government investment, mostly via Network Rail.
According to the Office of Rail and Road, net government funding of the railways was £3.2bn in 2015-16 (excluding debt). It paid £6.7bn in support, and received £3.5bn back.
Within this, the train companies made overall net payments of £0.6bn to the government. They also paid Network rail £1.5bn for track access charges. But to run successfully, they depend on Network Rail and other publicly funded support.
There are no concrete answers about the effect of nationalisation on railway finance – it largely depends on the way it’s done. Supporters say an integrated service without shareholder payouts would sove money, but opponents worry about public sector bureaucracy.
Would nationalised trains be better?
A nationalised system would have public sector rules on transparency and accountability, and would give the government more control over certain areas. But the quality of the service depends largely on the level of investment and how it’s run.
The best case study we can look at is East Coast rail. The service was rescued by a government-controlled company in 2009, after National Express fell into financial trouble and the franchise collapsed.
It was handed back to the private sector in 2015, but the experiment had undoubtedly been a success. Under public ownership, satisfaction rates climbed to 91 per cent – the joint top score for a franchised long distance operator. In its final year of service, it provided £225m to the Department for Transport, saw ticket sales rise, and made a pre-tax profit of £8.4m.
But this was just a single service for a few years. Expanding it nationwide would be a much bigger challenge.
Before privatisation, British Rail was criticised by some for being monolithic, costly and inefficient. Passenger numbers fell for years until private companies came in – usage is now at an all-time high.
But this may not be a very useful comparison because so many other factors have changed since then, such as better technology, the levelling off of average car usage and sustained public investment from Network Rail.
Figures suggest some train fares have gone up dramatically. There’s not a lot of good comparative data on this, prior to privatisation. However, the Rail Fares Index shows fares have gone up by an average of 121.3 per cent between 1995 and 2017, with long distance fares increasing the most.
Another study in 2013 showed that certain London to Manchester tickets had risen 208 per cent since privatisation – three times the rate of inflation (RPI) – although there was a lot of variation between different types of tickets.
On train punctuality, there are no directly comparable figures showing the effect of privatisation, but the overall trend seems to be positive. A review in 2001 suggested that punctuality had increased, until the Hatfield train crash in 2000, when the trend briefly reversed to pre-privatisation levels. Figures dating from 2002, collected by Network Rail, show punctuality has “risen dramatically” since then.
Again, it’s difficult to say how much credit private companies should get for this. Public investment, improvements in technology and natural industry development are also factors to consider.
But whatever the pros and cons of nationalisation, many rail problems are unrelated. The Telegraph has pointed out: “Overcrowding on many routes has become a problem, but this is largely down to Victorian infrastructure rather than any fault of the private operators. If British Rail was around now it would be facing exactly the same problems.”
This privatization was left to the last for a number of reasons
- Loss-making nature of British Rail
- Heavy dependence on external subsidies for rural and provincial services
- The need to see safety as an overriding priority
- Positive externalities of railways, – taking traffic off congested roads
- BR was an integrated national network with a complex system of fares and railcards.
- Railways had an extensive national infrastructure
Privatised Rail Structure
- Railtrack – privatized in 1996. Railtrack is responsible for maintenance and investing in the infrastructure. It sets charges for the TOCs and organizing the national timetable. After a series of financial difficulties, the private company of Railtrack closed down. The management of rail infrastructure and stations past to the state-owned National Rail.
- Train Operating Companies (TOC). These are the private companies who have the right to run rail franchises on part of the national network. In 2018, there are 12 major companies, such as Virgin West Coast managed by (Virgin Group 51% and Stagecoach 49%)
- Freight Operating Companies (FOC) Companies such as Freightliner transport goods and freight across the national network.
- Rolling Stock companies (ROSCOS) Three companies own all of the passenger locomotives and rolling stock this is leased to the TOCs
- Office of Road and Rail Regulator (ORR) – principal function is to safeguard interests of passengers while ensuring rules of competition between TOCs are fairly operated
Arguments for Rail Privatization
- Private firms have the incentive to increase efficiency through reducing costs and cutting waste
- Increased concern and responsiveness for consumer needs
- In theory, should enables a reduction in subsidies to firms. In practice, the outcome has been mixed. Subsidies fell until Hatfield Railcrash of 2000.
The subsidy per passenger is now £2 – less than the £4.50. However, this has been helped by the growing passenger numbers.
- Some private companies have invested in improving services, offering more trains and even opening more rail-lines. A good example is Chiltern Railways which have pioneered new services from Birmingham to London (providing more competition) and also reopening a service from Oxford to Marylebone.
- Traffic since privatisation has increased significantly.
Rail privatisation has seen a period of rising passenger numbers.
6. Rail Freight has grown and private companies have made the investment in new rail terminals. This growth has turned around many years of decline.
Arguments Against Rail Privatization
- Rail is a natural Monopoly, therefore there is little scope for competition because duplication would lead to higher average costs and not be practical. With limited scope for competition, privatisation is, in effect, creating private monopolies which are not serving the interest of competition
- Franchising has only little scope for competition because a contract is for 7-10 years. This gives firms a sense of security. There is need for regulation.
- Public bailouts. Many private franchises have needed to be bailed out by the government. The frustration for users, is that when private firms are profitable, their shareholders benefit, but when they fail, the taxpayer has to bailout the service. For the East Coast mainline, taxpayers have had to bailout Virgin and Stagecoach
- Lack of organization of the national network. E.G complications over tickets which use more than one TOC
- It is not clear where responsibility for safety lies in a fragmented network. E.G Railtrack stated that it is impossible to lower prices, increase investment for improved safety and meet targets for improved punctuality
- It has not been easy to cut subsidies, many argue the government needs to spend more subsidies to improve safety
- Less profitable services are always under threat.
- Rail fares have risen above the rate of inflation
Franchising
This involves companies making bids for the right to run a train service. E.g Virgin won the right to run cross country and West Coast Intercity services The company then has the right to run the service for a period of 7 yrs.
Related
- Pros and Cons of Privatisation