Rail 756: No justification for rail fare rises

Mystic Wolmar is normally dormant at this time of the year but here is a surefire prediction: the rail fares will not go up by RPI +1 per cent in January next year. That’s because rail fare rises, as I mentioned in my article on the subject in the Evening Standard, are now as toxic for ministers as fuel tax increases.

The public has, largely, cottoned on to the fact that it is the government, rather than the train companies, that is responsible for the increases. Hence, for the most part, ministers kept their heads below the parapet on the day the figures emerged, and there was no official announcement from the Department.

It must be said that the train companies get off rather lightly. They may not be responsible for regulated fares – season tickets and off peak returns – but it is Virgin, not the government, that sets the ridiculous peak time fare of a single to Manchester at £160.50, unaffordable to all but the rich, the desperate and the expense account beneficiaries. (And I love the 50p, a kind of added cruelty.) If the fares had only gone up by inflation since privatisation in 1996, that would be £85 today, affordable to most people.

Moreover, the train companies do nothing to defend passengers, their own customers, against these rises. The Rail Delivery Group seems even more pusillanimous than it was under its previous and far more sensible name (ATOC) and issued a cringing press release that does it or the industry no service at all: ‘Government decides the average change to regulated fares, including Season [the capital S is theirs] tickets, each year. For a decade, successive governments have regulated commuter fares so as to increase the share of rail’s costs paid by passengers rather than taxpayers. Our commitment is to enable future government fares decisions which work best for passengers, by continuing to get more out of every pound we spend and encouraging more train travel to pay for services and improvements.’

This really is patent nonsense as well as poor English. Why does the RDG not have the courage to say that the policy of above inflation fares is, in the long run, unsustainable since eventually it will lead to such astronomic levels that they will be unaffordable. The RDG should be as welcoming to fares rises as Ebola sufferers on its trains but instead it treats them as a rather unfortunate necessity that has ‘nothing to do with us guv’.

The RDG always gives the excuse that the higher fares are needed to pay for the big investment programme. But this is dishonest. Investment is funded by borrowing by Network Rail which is then charged to the RAB (Regulated Asset Base) on which track access charges are based. So the investment is actually paid for by the train operators and therefore saying that higher fares are

needed to fund the investment is simply misleading. The RDG should actually expose this, not collaborate in the dishonesty.

Moreover, RDG should be arguing that at a time of austerity with wages rising far below the level of inflation, then passengers should be protected from the increases. It should, too, be explaining why taxpayers’ money spent on the railways is not wasted but rather benefits all of society, not just train passengers. In other words, the RDG could be putting itself on the side of the passengers and and on the side of the industry more widely instead of looking like a self-interested trade association focussed solely on its own concerns. Or maybe…

As for the politicians, there is clearly a battle shaping up. Labour has already promised to abolish ‘flex’ which is the ability of the train operators to increase fares by up to 2 per cent (it used to be 5 per cent) more than the formula in order to adapt to local situation. The canny Lord Andrew Adonis did abolish flex when in government but it has returned. The operators are supposed to reduce other fares in order to ensure that the overall basket follows the formula, and while I am sure they do, the public is clearly not convinced. The train companies are apparently keen to retain this flexibility but it seems to me just another way in which they alienate the public.

Labour, too, has made a rather vaguer promise, too. In a speech on the day of the rail fares rises, Mary Creagh, the shadow transport secretary, set out plans for reforming the industry. In particular, she said that the franchise system will be reformed and that a public sector operator will be able to bid for the contracts. There will also be more devolution of decision making and there will be a new co-ordinating body for the industry. All well and good but she then went on to say that ‘with the efficiencies the above reforms will generate we will reduce fares to help tackle the cost-of-living crisis’.

That seems to me a bit of a non-sequitur. I see very little in the Labour proposals that will save money and allow it to be used to reduce fares. Indeed, the relationship between Network Rail and its investment plans, and the fare box garnered in by operators is so nebulous and tenuous that there is little hope of ‘savings’ being available to reduce fare rises.

The decision, therefore, will have to be political and this should be a no brainer for Labour. A back of the envelope calculation suggests that not imposing a 1 per cent rise on regulated fares will mean fares of around £40m are foregone. That though is only in the first year and of course is repeated thereafter and therefore can quickly become quite a significant number.

In practice, it may be a bit less than that because these rises result in a complicated negotiation between the Department for Transport and the operators to sort out precisely how much revenue is actually lost (there is a factor called elasticity which measures how much extra revenue would be obtained by a 1 per cent rise in fares – it may be as much as 0.9 per cent for commuters but as low as .6 per cent for leisure travel). Most of the impact will then indeed fall on the taxpayer as the operating contracts protect franchisees from these variations.

In fact, as my first paragraph contends, I have no doubt that the coalition will not proceed with a RPI + 1 per cent rise in what will be an election year. The only question is whether the rise will be RPI or less. Labour will clearly have to match any future commitment made by the Conservatives and if canny it will set out a passenger-friendly fares policy.

How could it pay for that? Well the clever way would be to use the fact that the Network Rail debt is going on government books by writing some of it off. Yes that would be a one off expense but the debt is never going to be pared down as the consequences for the railway would be disastrous. Better to take a one-off hit and then Network Rail’s finances could be instantly transformed without any impact on the general public.

Indeed, it was instructive that the other day when I was talking to a Network Rail senior executive, he was incredibly sanguine about the £34bn debt and reckoned that at one stage in the near future it would be written off in whole or in part. Rail fare rises, therefore, are in fact a minor player in railway finances. It is the debt that is the big gorilla in the room.


Complexity gets lost in controversy



The decision by the government to prioritise the refranchising of East Coast smacked of narrow political motivation and deep dishonesty. There were many other franchises that could have benefitted from something better than a two year patch up deal but the fact that East Coast was being successfully operated within the public sector undoubtedly proved an irritant that ministers were anxious to get rid of.

However, some opponents of the re-privatisation are using the wrong statistics to back their case. Yes, the company did pay a premium of £217m to the Department, representing a tax of £11 per passenger and patronage grew by 4.6 per cent, not a bad performance. However, the amount of the premium would, by and large, have been received by the government had there been a private operator. It is a product of all kinds of factors over which the operator has no control, such as track access charges, leasing costs and wages.

Moreover, things are going to get worse. Once the ridiculously expensive IEP trains start to be introduced on the East Coast, premium may well be turned into subsidy, something over which the management of the presumably privatised train operator will have no control.

As regular readers will know, I have no truck with franchising and still seek an answer to the Wolmar question of ‘what is franchising for?’. I think the whole basis of the argument in favour of franchising is flawed, which is why no other country has adopted this model in relation to the whole railway. Asking the private sector to make guesses on future revenue streams over a long period is a mug’s game. However, the arguments against the process need to be the right ones, not born of political expediency and misreading of statistics.



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