As part of our ESRC sponsored Chalk + Talk seminar series the SMF welcomed Karel Williams, Professor of Political Economy at the University of Manchester Business School, who presented research on UK rail policy since privatisation, the rail franchising process and the unhelpful conflicting trade narratives present within the industry.
Professor Williams set out what he believes to be the main reasons why UK rail policy often falls short of what is actually required. The first is that the complexity introduced by privatisation has created a muddy system which lacks transparency (i.e. trains are leased from one company to the operators who then run them for profit on tracks owned by another organisation which charges the operator but also uses public funds to develop and sustain the network). Second are the competing narratives from within the industry which he believes are unhelpful and cause confusion among both the public and policymakers. On the one hand, Train Operating Companies (TOCs) claim privatisation as a success (with no costs) – more passengers, higher satisfaction, less public subsidy; and on the other, Trade Unions claim privatisation has been a failure (with no benefits) – fragmentation of the rail network, higher fares and the extraction of profits which are a result of taxpayer funded infrastructure investments.
Professor Williams argued that these factors stop us from addressing three key questions which need to be answered before the UK can have a sustainable rail network:
- How to deal with ‘not enough money from fares’ i.e. determining the level of operating subsidy and investment
- What to do about Network Rail’s wrecked balance sheet i.e. debt write-offs to deal with legacy problems
- What to do about the TOCs’ option on profits without investment or revenue risk i.e. the need to rethink franchising
Not enough money from fares (or operators)
Despite sharp rises in passenger numbers and increased fares, Professor Williams pointed to figures indicating that the revenue from ticket sales only pays for 65% of railway operating costs. Currently, the UK’s railways are short in funding by £10 billion per year. £4 billion of this gap is met by state subsidy and the remaining £6 billion through public borrowing to fund investment. However, it is clear that this is not a phenomenon exclusive to the privatised system but a long-standing problem, regardless of ownership.
Privatisation also promised to bring in private capital. But as the profit margins in rail are often quite low, private companies have relied on the state to provide funds and guarantees for the necessary investment.
Compounding both of these issues is the fact that the British public expects more services, better rolling stock and cheaper travel than it is prepared to pay for at the ticket office.
The National Rail ‘balancing act’
When Network Rail replaced Railtrack in 2004 amidst controversy about the state and safety of the UK’s rail network, the new company was placed into a quasi-public position where it received the subsidies previously given directly to TOCs (to the tune of £5 billion per year), plus it was given the ability to issue state-underwritten bonds in order to fund the necessary capital expenditure.
Professor Williams argues that the removal of direct subsidies to the TOCs have led to Network Rail lower access charges, meaning private operators still receive a hidden subsidy from the taxpayer. This comes on top of the cost of granting £44 billion of government-backed bonds, which had previously been kept off the public balance sheet but since 2014 have been included in public debt.
Professor Williams believes this debt will never be repaid, citing that Network Rail now pays more in debt interest than it funds in network upgrades and maintenance. He believes that the government must eventually write-off this ‘legacy debt’ before it can properly address how to properly fund future rail infrastructure.
Profit without risk?
Professor Williams argued that many franchisees are taking profit from their rail operations without making necessary investment and without taking on risk in the revenue line.
He cites the West Cost Main Line (WCML) franchise as an example where a TOC has made a profit on the basis of low private investment but heavy state subsidy, particularly on line upgrades. However, even where TOCs do not extract high profits Professor Williams showed that the downside risk is capped thanks to the low penalties involved should franchisees pull out of their contracts early. He believes this leads to operators having no incentives to make significant capital investments and that instead many choose to take profit in the early years of their franchise before deciding whether to walk away and pay fines which are less than the value previously extracted or premiums due in the remaining years of the franchise.
You can download the slides from Professor Williams’ presentation here. You can also read more of Professor Williams’ work on these issues in The Great Train Robbery: Rail Privatisation and After (2013) and The Conceit of Enterprise: Train operators and the trade narrative (2013).
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Chalk + Talk is the SMF’s popular lunchtime seminar series, run in partnership with the ESRC. Chalk + Talk brings the best policy output from the world of academia into the heart of Westminster.