Rail 726: TUC analysis of rail privatisation

This is going to be fun, Both the TUC and the Association of Train Operating Companies have published research on the state of the rail industry and not surprisingly come up with very different conclusions.

So in this column and the next one, I will analyze and critique, in turn, the two documents and then try to assess which is the more convincing. The TUC-sponsored document, given the rather predictable title of The Great Train Robbery was not, actually, produced by the TUC but rather written by an academic team supported by the Economic and Social Research Council and led by Karel Williams, Professor of Accounting and Political Economy. Manchester Business School. So it cannot be dismissed as lefty nonsense.

The analysis focuses on the train operators, asking the question which I have often raised. Essentially, profits in the capitalist system are a reward either for investment or for taking risk. The train operators, the authors point out, do neither. Franchising, they say, a form of ‘predatory contractualism, because the bidding process encourages companies to game the system with optimistic projections of passenger numbers and back loaded premium payments’. Remember it was a government adviser, Shriti (now Lady) Vadera, an experienced City  who once called the train operators ‘thinly-capitalised equity profiteers of the worst kind’, precisely what the authors reiterate.

ATOC always argues that profits represent only a small proportion of turnover and amount to around £250m per year, a small sum in relation to the overall industry turnover of £11bn. However, Professor Williams and his team looked at the five most subsidised train operators between 2007 -11 and found that around 10 per cent of the subsidy, representing £500m, has been made in profits during that period.

Again, as I have pointed out numerous times, the notion that the operators are a profitable business is nonsense. Network Rail receives £3.5bn in direct subsidy annually and without that, all but one of the train operators would be in receipt of subsidy. The direct subsidy to Network Rail distorts the whole economics of the railway, making it look like the operators are profitable when, in fact, they are not. Therefore, operators are in effect making a profit out of taxpayers’ contribution which, as the authors suggest, if this were more widely understood would reinforce public support for renationalisation. They make m oney by guessing correctly on future passenger demand. The result of this system, they say, is that ‘the contracting state is running a very peculiar kind of casino where the odds are rigged in favour of the corporate punters and against the house’.

The authors then set out a very carefully framed argument criticising this happy arrangement. They are not against the idea of subsidy – indeed, their basic premise is that it is impossible for the railways to operate without it – but merely questioning why part of that subsidy is going in profits to the private sector to companies. They say, in rather sharp language: ‘There is a clear difference between principled corporate welfare for firms that provide a socially valuable service in an appropriate way, and predatory corporate looting of the state by railway or other companies.’ The beneficiaries, they point out, are not poor companies in need of support, but rather ‘subsidiaries of European state-owned rail operators, large multinational transport conglomerates like Stagecoach, which grew out of UK bus privatisation, or influential facilitators of outsourcing like Serco.’

As well as the shaky case for franchising, the other issue highlighted in the report is the inherent difficulties facing the railways’ finances, notably the continued accumulation of debt by Network Rail which is now around £30bn.  Professor Williams and his team note that the accumulation of such a huge debt in such a short period of time has resulted in ‘a disappointingly small amount of new facilities or dramatic upgrading of the rail infrastructure.’

As highlighted in this column recently (Rail 721) the rapid rise in Network Rail’s debt cannot be allowed to continue. Indeed, under the rules set by the Office of Rail Regulation, in Control Period 6 (2019-2024), the debt will reach a level beyond which Network Rail is technically allowed (I will not bore you with the details at this stage, but will write about that situation later in the summer when Network Rail publishes its long term planning document). Then some other method will have to be found of funding the continued expansion of the railways.

Not only will it forever be impossible for Network Rail to repay that debt because it would involve in a massive rise in access charges and consequently ticket prices or subsidy, neither of which is politically acceptable.

So, what is to be done? The authors struggle, like the rest of us, but put it eloquently: ‘We are where we are, in a muddle of entrenched interests, unknowable technical complexity, and taken for granted and unquestionable assumptions which have turned the railways into an intractable problem’. The authors actually suggest long term strategies such as changing the taxation system in favour of the railways and having much stronger regional government, but in the interim, recognising these are unlikely to happen in the short term, In the short term there is a six point plan, starting with phasing out the private train operators as their contracts run out and merging Network Rail with the operations. These have been longstanding suggestions in this column and elsewhere but their other ideas are novel: separate out day to day railway operations from long term capital spending. I’m not sure that this would work, but it is an idea worth considering, given the inefficiencies highlighted by the McNulty report. They also want to do away with the roscos, though that would take time since they have some very long leases, and they want more schemes like Crossrail where money is raised from local businesses to pay for railway improvements. They also want to see more investment in railways during recessions to counter the economic trend.

 I can hardly do justice to the report in the short space allowed here. Its detailed analysis and tables are well worth closer examination. They suggest a case which ATOC’s document, which seeks to justify the train operators’ existence, attempts to answer, even though it was actually written simultaneously. Read all about it here in the next issue



HS2 rise in costs will raise doubts


It was hardly surprising that the announcement of the HS2’s increase in projected costs was buried on the day of the Comprehensive Spending Review announcement. Coming hot on the heels of the doubts about the project expressed by the National Audit Office, the doubts about the scheme are growing. The projected cost of £50bn including rolling stock – I recognise it includes contingency but that is necessary on past experience – has certainly made many previous supporters doubtful about whether the scheme is really feasible. It reduces the already very weak benefit cost ratio which has been used to justify the project by 20 per cent which means, depending on the assumptions, for the first leg between London and Birmingham it has almost reached 1 -1, though in fairness the £50bn cost refers to the whole scheme and most of the increase is on the northern sections.

The opposition is growing amongst time expired politicians who have nothing to lose from expressing their honest doubts. The latest to join this clan is Alistair Darling, the longest serving transport secretary in recent years who was quoted recently in the Daily Telegraph as saying ‘My worry is that it will suck money out of the budget that will be needed, for example, to upgrade the East Coast main line.’ He went on to give other examples of where spending is needed: ‘There are severe capacity constraints on the London commuter routes and indeed other routes at the same time. Don’t let anyone kid you and say there’s a ring-fenced budget and nothing else is going to be affected.’ This has been precisely my point for a long time.

Supporters of HS2 are deluding themselves if they think that is the case. They need to show, therefore, that not only is HS2 worthwhile in its own terms, but also that it is a better option than the transport enhancements its construction will displace.

I must add, it is clutching at straws for Greengauge 21 to produce a report listing that 890,000 job years will be created by the building of the project – over the next 60 years; at the peak there will be 50,000 jobs but that is hardly a big deal. The same point about thousands of jobs being created is often made by the Ministry of Defence when justifying the latest weapons extravaganza. Yet, on the other hand, you get Tory ministers saying the public sector never creates jobs, but merely expropriates money from taxpayers.

Of course spending £50bn will create jobs, but according to this back of the envelope calculation each job year will cost around £56,000. Well spend £56,000 on anything and you are bound to create some employment. As with the military spending, it is the question of whether it is worthwhile that is crucial and the higher the project cost goes, the less it seems worthwhile, even if all the optimistic assumptions about its use are borne out.

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