Rail 721: Rail finances undermined by Network Rail’s £28bn debt

The Office of Rail Regulation has been much more dynamic under the leadership of Richard Price in shining a light on the rail industry, to both dispel myths and highlight issues of concern. It now publishes a financial analysis each year under the unexciting title of GB Rail Industry Financial Information and the second one, published in April, covers 2011/2. Don’t be put off by the title, there’s plenty of information in there accessibly presented, and it is free online.

The big issue is, of course, the relative amounts contributed to the industry income by passengers and taxpayers. The overall income of the industry was £12.5bn including the subsidy from the government of £4bn (exactly the same as in the previous year), most of which was paid directly to Network Rail. Passengers paid £7.2bn in fares which, while being an increase from the previous year of 8.7 per cent actually, interestingly, represented a drop in the fare per journey if inflation is taken into account at just under a fiver. Another revelation is that the London Overground is the most expensive railway in the country, charging 14p per passenger kilometre while Merseyrail, at 7p, is the cheapest.

The rest of the income, £1,3bn is made of sundries almost equally divided between Network Rail, which receives rent from station facilities, and the operators, whose main sources are catering and car parking. The overall profit for the rail industry increased by nearly 50 per cent from the previous year to £875m but most of that was accounted for by Network Rail (unfortunately the periods used by ORR and Network Rail are different so an exact breakdown is not possible). However, the report suggests train operators made around £300m profit in the year which represents the relatively low figure of 3 per cent of overall turnover, but as I have written many times before that is an unusual way of looking at profit as it is usually expressed in terms of return on investment. Since operators make very little investment, that figure is not published.

The report details the amount each franchise received in subsidy, taking into account the grant given directly to Network Rail and it is so satisfyingly ironic that it is the East Coast franchise managed by the state-owned Directly Operated Railways which is the least subsidised, when the direct grant is taken into account, receiving just 1 per cent of its income from government subsidy. This contrasts with an average across the industry of a third and of course more for the regional and rural operators such as Northern, Scotrail and Wales & Borders.

These figures though are open to misrepresentation from all sides. There has undoubtedly been an increase in subsidy from the days of British Rail, and some is down to the inefficiency created by fragmentation and privatisation. But also, some is due to the higher level of investment and it is almost impossible – McNulty certainly failed – to disentangle the various reasons for the high cost of the industry between the causes related to the higher use of the railways and the need to renew its assets from those resulting from the structure.

It was, for example, silly of the New Statesman to run a story on its website under the headline ‘Office of Rail Regulation: nationalised rail firm is most efficient in the country’. The fact that East Coast requires least subsidy is down to the particular pattern of the franchise. It runs very few trains, on a busy line with relatively old rolling stock and does not have to run lots of unprofitable services. That is not down to efficiency. However, the fact that the franchise is clearly well-run and could happily remain in the public sector demonstrates, as I wrote in the last issue, that the decision to rush through its reprivatisation, given all the difficulties other franchises face, absolutely scandalous.

The other aspect of the report which received nothing like the attention it deserves – though the Daily Telegraph did cover it – is the amount of interest on its debt that Network Rail has to pay annually. This has risen to a staggering £1.5bn or, to put it another way, more than £1 for every rail journey. How has this come about? Well basically, in order to hide the amount of money being spent on the rail industry, successive governments have allowed Network Rail to borrow on their credit card. Network Rail now owes £28bn, which again to illustrate it means around £4,000 for each of us.

This issue is going to have to be addressed. Senior figures in the rail industry – Rail Delivery Group, anyone? – have consistently sat on their hands ignoring the ever mounting but it cannot go on like this. If interest rates went up – sorry – when interest rates go up, the burden on the rail industry is going to be untenable. Moreover, it permanently gives opponents of rail a stick with which to beat the industry as the subsidy will have to increase to pay the interest.  Eventually it will have to be written off. As an aside, in a way it is peanuts. When Japanese railways were privatised in 1987, they owed – take a deep breath – $309 billion dollars, or at the rates prevailing then, around £150 billion. So what’s £30bn or so between friends? Actually, joking apart, it is probably the biggest threat to the rail industry’s long term financial wellbeing.

 

 

Barriers do not prevent fraud

 

I was amazed to leave a train from Edinburgh at King’s Cross during the evening peak the other day to find that there barriers were all open. When I tweeted this, I received several responses saying this was commonplace and seemed to be down to the fact that when they are closed, they require a large number of people to staff them which is expensive. This is because some tickets don’t work, people with large amounts of luggage or buggies often require assistance and other people will keep trying to put through their reservation coupons which are the same size and colour as the ticket. They are not in use sporadically through out the day when staff have breaks or there are not enough of them or they are transferred to other duties for short periods. They seem hardly ever in use at weekends and even when they are being used, they can be opened with almost any ticket – single to Finsbury Park – or an Oyster card

I am increasingly of the view, therefore, that the Department for Transport’s insistence on barriers as part of franchise deals, even in places like Sheffield and York where they cause major inconvenience (York, in fact, was shelved and Sheffield would require a ridiculous £3m bridge) comes from a different agenda. Given the bollard farce that surrounds so many stations, including Kings Cross – highlighted frequently in the wonderfully informative Railway Eye blog, it is possible that security was behind it, but no one admitted to that. Gate lines help to line passengers up for the CCTV cameras which now have individual character recognition.

Richard Malins, a consultant who has long argued against barriers, reckons: ‘The staffing costs, never mind the capital and maintenance costs, must outweigh the benefits, so they are just too expensive, However, the DfT said there was a good business case, probably some multiplier of station revenue based on an inappropriate comparator.’ While barriers do have a role in suburban stations, for long distance there is no doubt that putting staff on trains is a better option. Indeed, I have noticed that on train staff tend to run fewer ticket checks since barriers have been installed at Paddington, for example.

 

Rolling stock word crash

 

…and finally, while on the subject of daftness at the DfT, here is a wonderful bit of gobbledegook written by civil servants for an answer in the House of Lords. The veteran Libdem, who knows a thing or two about railways, was seeking to know whether there would be enough rolling stock given the chaotic situation over franchising (although he put it in more polite Parliamentary language). A good question and one to which the hapless Libdem, Lord William Wallace of Saltaire, who was deputising for an absent minister, responded in a way which seemed to suggest his knowledge and understanding of the industry was, well, lacking somewhat:

‘Rolling stock deployment is a matter for the train operators with the Government’s role primarily focused on ensuring that this represents value for money when the taxpayer’s interest is involved.

It is therefore for franchise bidders to determine the rolling stock requirements for routes within the franchise area and to work with the rolling stock owning groups to make decisions on investment in both new and existing rolling stock. The Department for Transport is currently investing in rolling stock for the Thameslink and Inter City Express programmes. These procurements will significantly increase the national fleet size, enabling the department’s investment strategy requirements to be met.’

In other words, rolling stock deployment is for the operators to determine except when it isn’t. Or something like that.

  • Simon

    I’m not sure you understand how the RAB works and the need to raise debt to see that the mechanism does what it’s supposed to. Suggest you read up.

  • Isabel White

    Between New Cross and London alone there are several hundred tons of scrap rail, switch gear, junction boxes, concrete ducting etc that is routinely left by the track after the “routine maintenance” sessions. Nationally this must equate to thousands of tons worth millions of pounds but nobody ever seems to say or do anything about it. Have a look at how much is piled up outside the new Blackfriars Station – I bet much of this will never be removed…

  • RapidAssistant

    Personally, I’ve never bought the argument from any of the long distance operators that ticketless travel is as big a problem as they make out. First of all the chances of getting caught are pretty much 100%, and the penalties so much higher that few would try and attempt it, compared to say someone trying to avoid a £4 fare from the suburbs to the city centre. I have never caught a long distance train from King’s Cross that doesn’t appear to be at least 80% reserved, which means in theory that all of those seats have tickets. All seems too much pain for too little gain to me.

    And anyway, when you hear TOCs harp on about “ticketless travel costs us £x million every year” to justify the expense on said barriers, exactly how do they arrive at this figure??

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