Rail 573: Government hides the true cost of the railways

Conventional wisdom has it that European railways receive far more subsidy than ours, and that’s why their passengers pay less and benefit from more investment in new trains and lines. In fact, the truth is far more complex and the vast increase in subsidy in the UK over the past five years means that our railways are probably receiving far more than the network in many other countries which have retained largely state ownership and control.

I say ‘probably’ because international comparisons were difficult enough to make when railways were unified and entirely state controlled, but are now virtually impossible because of hidden subsidies through, for example, the purchase of services on uneconomic routes by local and central government. The boss of Deutsche Bahn, Hartmut Mehdorn once told me at a press conference that his company receives no subsidy, which is strictly true, but the regional authorities subsidy vast numbers of services which otherwise would not be run. Such obfuscation is made for political reasons and does not make it easy to find out precisely what is happening.

Even working out a clear pattern of subsidy payments over time in the UK railway is no easy task and the Department has deliberately tried to confuse matters in the White Paper published in July. The whole thrust of the White Paper was, as it says on Page 127, to bring subsidy down ‘nearer to historic levels’ (note it does not say down to historic levels).

However, what exactly are those historic levels? Under British Rail, it was undoubtedly true that the railways were less well funded by government than in other countries. Part of this was down to efficiency. Over its near 50 year life, British Railways cut its number of employees from 650,000 to 150,000, and the business-oriented railway developed in the 1980s, with InterCity as the flagship brought in considerable extra revenue.

By the end of the 1980s, during the Lawson boom years government when rail uses soared, government support for the railway was down to around 25 – 30 per cent of BR income. However, subsidy increased greatly in the ensuing recession as passenger numbers fell and revenue remained static. Interestingly, the table in the White Paper on subsidy (Fig 12.4, p 127) starts in 1991/2, after the effects of the boom had warned off. Therefore, it is not suggested that ‘historic levels’ are the 25 per cent which British Rail was achieving after a similar period of economic growth

Government support represented 43 per cent in 1991/2 and peaked at 50 per cent the following year. Then it gets very messy – quite unnecessarily so – because receipts from privatisation sales are then lumped into the years 1995/6 and 1996/7. The figures of 15 and 29 per cent respectively for those years are therefore effectively meaningless and it is impossible to calculate whether the railway was getting more efficient in that period.

In the subsequent early years of privatisation, with passenger revenue growing healthily enough to allow most (but by no means all) of them to stay in business despite reducing amounts of subsidy, the situation improved with support being reduced to 26 per cent by 2000/01. However, again, this figure does not provide an accurate representation of what was happening. Railtrack was funding investment through borrowing which previously would have come from the government and is now on Network Rail’s books. Moreover, the rolling stock companies lease trains which means that their capital cost is spread over their lifetimes rather than being lumped into one year which occurred under BR – a daft form of accounting for capital expenditure, which proved that the Treasury always saw the purchase of capital equipment for the railways as a cost rather than investment. The effect is to make the railways look as if they are receiving less support than before.

After 2001, the situation deteriorated as we had the Hatfield train accident which reduced passenger revenue, and led to a massive programme of – often unnecessary – work on the railway to ensure that there was no repeat. In addition, the cost of building High Speed One is lumped into the statistics making them look worse, and so in the past three years, subsidy has been around the 50 per cent mark, historically very high. Network Rail’s spending, set by the last regulator, Tom Winsor, has been very high and is only reducing slowly. Moreover, that does not show the right position because Network Rail’s borrowing is not included. That has been increasing at around £2bn per year and, will clearly never be paid back. At some stage it will be consolidated into the government’s accounts and therefore it should really count as subsidy.

All of this suggests that the subsidy for the railways is a political issue which the government does not want to address honestly. The real comparison with the past should be with the height of the Lawson boom twenty years ago when railway usage was at a historic high. It is again, today, thanks to the unprecedented period of economic growth. Yet, unlike then, railway subsidy is at a historic high which the government now says it wants to reduce. The reasons, as regular readers of this column will know, are structural. The so-called privatised railway – which is in effect subject to far more state interference than at any time in its history – sucks up huge wads of money in a way that is largely unaccountable, thanks to its Byzantine structure.

In order to reduce subsidy levels as set out in the White Paper, the government is banking on the economy continuing to grow and consequently franchise support reducing dramatically, along with the end of investment in High Speed One. It is a heroic assumption. Should the Brown boom collapse, the railway finances as set out in the White Paper will be completely unsustainable.

The East Coast franchise won by National Express recently continues this pattern. The rates of revenue growth underlying the premium payments, which increase at an around annual £50m each, are in the same ball park as those which Sea Containers could not meet, around 8-10 per cent annually. While excess revenue or heavy losses are shared with the Department, reducing National Express’s exposure, it would only take one Hatfield or 7/7, less alone a serious economic downturn, to make these figures unachievable.

Oddly enough, history is almost repeating itself. In the White Paper on P145, there is a table showing franchise payments are supposed to fall from the their current level of around £2bn to £535m by 2014. Ten years ago, there a similar pattern was predicted. The 1997/8 annual report of the Office of Passenger Rail Franchising (the body that preceded the Strategic Rail Authority) has a table which shows that franchising costs were due to fall from £1.9bn that year to £650m by 2003/4. The similarity in numbers (which of course ignore inflation, direct payments to Network Rail and changes in track access charges) is rather uncanny. And what happened? Actual payments in 2003/4 were around £2bn. Several things went wrong in between – the collapse of Railtrack and the deal to upgrade the West Coast Main Line which scuppered the numbers relating to the two Virgin franchises, various franchisees finding they could not meet the reductions in subsidy because BR had been more efficient than they realised and, most notably, the disruption caused by the 2000 Hatfield accident which affected performance and therefore revenue. But, as the expression goes, sh*t happens and one thing is certain, we will not get through to 2014 without something going wrong. Then this strategy of squeezing the franchisees and pricing people off the railway will not look so clever.

Tory madness

Anyone who thinks that the Tories are providing a coherent opposition, would have to think again after reading John Redwood’s recent rant (August 13th) in the Daily Telegraph. It would barely qualify for a grade at a GCSE exam and is as mad a piece of political diatribe than I have ever seen. He is suggesting reintegrating track and train, but then having competing companies; he is arguing there should be vehicles which can both drive on roads and then go on tracks in order to reduce congestion; and here’s his best bit: ‘the railway industry runs old and heavy style trains on the tracks, on steel wheels. They have little grip, making acceleration and braking very difficult, and bringing the network to a grinding halt in the wrong kind of snow or when leaves fall’. So he’s suggesting tyres instead, as on the Paris metro, unaware that the energy used would be far greater and that the idea is wholly unpractical.

Competition and private capital are the answer he says. Oh dear, has he not heard of Railtrack and Metronet? And how do you get competition between integrated train companies?

This is a great shame. We need a healthy opposition on transport matters and hopefully the shadow transport secretary, Theresa Villiers will find her feet soon. In the meantime, she should make sure Redwood keeps his mouth shut and his hands away from the computer.