Why rail fares keep rising

Here we go again. It’s a new year but an old story. Commuters are up in arms about rises in rail fares and they’re looking for someone to blame.

Aside from the fact that central London was half empty yesterday and finding a seat on a train would have been no problem for most, they have a good point. This is the 10th successive year of above-inflation fare rises, and there is no sign of any change in policy coming until the next general election at least, and probably well beyond that.

But finding the right target for passenger anger is made difficult by the fact that transparency is not a feature of the rail industry and railway economics remains a dark art. The train companies, the Government, previous governments, and even Network Rail (responsible for the track and infrastructure) are all in the frame for blame. And actually, all of them deserve at least a bit of buckshot, if not a high-velocity bullet.

The railways may have been privatised in the mid-Nineties, but in reality they are a mix of private and state interests, with most of the purse – and other – strings still being pulled by the Government. Forget the notion of a raw capitalistic enterprise with energetic entrepreneurs seeking innovative ways to fleece the public: the train operating companies are pretend capitalists who have very little room for manoeuvre and invest very little. They complain that they make only a 3 per cent profit – or around £250 million annually – yet that is a misleading figure, based not on investment, as with a conventional company, but on turnover.

The train companies will receive a proportion of the extra fare income that yesterday’s rises generate, thanks to an opaque process that began last summer. Once the fare rises (which are based on July’s inflation figures) are known, the Department for Transport (DFT) and train companies begin negotiations over how the spoils should be divided. This is because rising fares will deter some passengers from travelling, and under the franchise agreements the DFT has to compensate the private companies for this loss.

However, given the recent inept performance of the DFT over the West Coast franchise, it would not be reckless to suggest that perhaps the train companies get rather more of this extra dosh than they need to cover any passengers lost as a result of the rises. The projections and the sums of money that follow are, of course, “commercially confidential”, and therefore not released to the great unwashed British public.

There is a real irony here. The legislation to regulate season tickets and off-peak fares was designed, at the outset of privatisation, to protect passengers from greedy private companies exploiting their monopoly position. Originally, the rises for “regulated” fares were set at the RPI measure of inflation minus 1 per cent, as a way of encouraging rail travel. In fact, since 2003 – when the formula was changed by the Labour government to RPI plus 1 per cent – the legislation that supposedly protects consumers has been used against them.

However, the situation with unregulated fares – which represent about half the income of the train companies – is completely different. Train operators are free to set all other fares, which include the very expensive peak fares on intercity and other routes, first class and advanced, and all of the increase will go to them.

For their part, the train operators argue that the extra revenue from unregulated fares is needed in order to meet the financial arrangements that come with the franchise deals – most of the train companies pay an annual premium to the Department for Transport. They say these unregulated fares are set commercially because operators face competition from airlines or the roads. But many people making occasional journeys at peak times have no option but to travel then, and are therefore heavily penalised for their lack of flexibility.

A spokesman for the train operators justifies the situation by saying: “Train companies have to meet tough financial commitments agreed with the Government when franchise agreements are signed.” It is also the case that since 2007 there has been a cross-party policy of increasing the share of the cost of the railways paid by rail users, which is now around two thirds, compared with less than 50 per cent six years ago. Yet this does not negate the fact that the train operators decide the level of unregulated fares and many have gone up far more than regulated fares. A peak return from London to Manchester in standard class, for example, is now a stunning £308.

Provided the DFT gets its sums vaguely right, the Government therefore will receive a substantial proportion of the money from increased fares. Ministers’ explanation for the rises is that this money will be used for investment in the railways – but the relationship between investment and fare rises is a distant one.

In fact, the amount of investment going into the railway for extra capacity such as improved track and better signalling is determined by a complex process of negotiation involving Network Rail, the Office of Rail Regulation and the Department for Transport. Ministers set out an investment programme in five‑year periods – the current one runs out in March 2014 – and allocate funds accordingly, and then the Office of Rail Regulation assesses whether enough money is available to carry out the plans. Network Rail then undertakes the work, primarily through contractors.

New trains are provided through a different, and similarly tenuous, relationship. The Government will determine that there is a need for new trains and build this into franchise contracts. The trains are then leased, with the operators paying for them out of their income from the fare box and any subsidy they receive from the DFT. However, the level of fare rises is not linked to the acquisition of new rolling stock. As one angry rail traveller tweeted yesterday: “Why should I pay more to travel in Lincolnshire when the services and rolling stock are so bad?”

Overall, then, there is very little relationship between yesterday’s fare rises and future investment plans. Indeed, for the past two years, the Government, in the face of public pressure, has backed down from proposed fare increases of RPI plus 3 per cent to the current RPI plus 1 per cent, which has resulted in a reduced income of around £250 million annually – enough to kick-start an investment programme of, say, £2.5 billion. Yet there has been no suggestion from ministers that this cut in fares income will reduce the amount available for investing in the railways.

The position of Network Rail – a state-owned company in all but name – adds to the confusion. It spends around £6 billion a year on maintaining the railways but has been sharply criticised for excessive costs. A report in the spring of 2010 by Sir Roy McNulty, the former chairman of Short Brothers, the airline manufacturer, identified wasted spending amounting to 30 per cent.

Network Rail is therefore being required to cut costs; McNulty reckoned it could save £1.8 billion by 2019. Justine Greening, who was Transport Secretary until the autumn reshuffle, argued that if these reductions were made then fares could, in future, be held steady, but few industry insiders believe that such big cuts could be made without compromising performance or safety.

So the real blame for the fare rises must lie with us, the passengers, and our appetite for rail travel. Ever since the early Nineties, passenger numbers have kept on rising steadily. Remarkably, even the long-term trend of passenger numbers falling during recessions has been reversed, as numbers have continued rising except for 2009-10, and even then the fall was very small.

The one way to ensure that fare rises are lower in the future is for more people to shun the railways and use the alternatives – or simply not travel. While numbers keep rising, even in times of recession, why should either the train companies or their political masters change the policy?

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