Rail privatisation has failed to deliver, concludes new research

By agency reporter
9 Jun 2013

Rail privatisation has failed to deliver for rail users, has cost taxpayers huge sums of money, and brought in little private sector investment.

That is the verdict of a new research report written by the Centre for Research on Social-Cultural Change (CRESC) at the University of Manchester and published on Friday 7 June 2013.

The Great Train Robbery, commissioned by the Trades Union Congress (TUC), shows that private train companies are heavily dependent upon the public purse to enable them to run services.

Moreover, when train companies do make a profit, barely any of it is re-invested in the railways, says the study.

It reveals that those firms receiving the largest state subsidies spend, on average, over 90 per cent of their profits on shareholder dividends.

This contrasts sharply with the East Coast Mainline, which is currently state run and which re-invests all of its profits into improving the service.

The Great Train Robbery looks at many of the key objectives behind the decision of Conservative Prime Minister John Major's government to privatise the railways in 1994. The report questions whether any of these have been achieved:

* Cost effectiveness - train operating companies are entirely reliant upon public subsidies to run services. The top five recipients alone received almost £3 billon in taxpayer support between 2007 and 2011. This allowed them to make operating profits of £504 million - over 90 per cent (£466 million) of which was paid to shareholders.
* Extra investment - the report shows how the average age of trains has risen since rail privatisation, from 16 years in 1996 to 18 years old today. Just £1.9 billion was spent on rolling stock between 2008 and 2012, compared to £3.2 billion between 1989 and 1993 (the four years before privatisation.)
* Over 90 per cent of new investment in recent years has been financed by Network Rail (the taxpayer funded body responsible for rail infrastructure), and comes mainly from taxpayer funding or government-underwritten borrowing, says the report.
* Significant upgrades to infrastructure, such as the development of the West Coast Mainline, have been paid for by Network Rail.
* Passenger comfort - the report says while there has been a 60 per cent increase in passengers since 1994/95, there has only been a three per cent increase in new carriages, resulting in serious overcrowding on many routes.
* Innovation - even where there has been private sector investment in new technology, such as Virgin's tilting trains, it has been underwritten by the state through subsidies to train operating companies and guarantees to rolling stock leasing companies.
* Added value - The Great Train Robbery shows how train operating companies paid Network Rail just £1.59 billion in track access charges in 2012, compared to £3.18 billion paid to its predecessor Railtrack in 1994. This represents an 'indirect subsidy' from taxpayers as train companies are getting track access on the cheap. It also means that the full extent of taxpayer subsidy is far greater than is often reported.
* Investment in infrastructure has largely been funded through borrowing by Network Rail which now has debts of over £30 billion, and is spending more on repaying this debt than on railway maintenance, says the report.
* Competitive fares - the UK has the most expensive rail fares in Europe. Long distance, day return and season tickets are all around twice the price of similar tickets in France, Germany, Italy and Spain, which have publicly-run rail systems. Average train fares in the UK increased at three times the rate of average wages between 2008 and 2012.
* More passengers - the report dismisses claims that privatisation has helped increase the number of people travelling on the railways. It says that passenger growth has mostly been down to rising GDP and changes in employment patterns rather than because of privatisation.

Commenting on the report, TUC General Secretary Frances O'Grady said: "This study explodes the myth that rail firms are bringing added value to our railways. In reality they rely upon taxpayers to turn a profit, virtually all of which ends up in shareholders' pockets, rather than being used to improve services.

"Rail privatisation has not brought the improvements its cheerleaders promised - the average age of trains has increased and most new investment is funded by the state.

"The claim that private train operators are responsible for more people using the railways must also be taken with a huge pinch of salt. Passenger growth has mirrored changes in the wider economy and is not the result of creative marketing drives by companies.

"The government must accept that the current model is broken. Its determination to impose franchising across the network - even on the East Coast Mainline which is performing well as a nationalised service - shows ministers are ignoring the evidence of 20 years of failure," she declared.

CRESC Director Professor Karel Williams added: "The privately owned train operating companies have hijacked the government's rail reform agenda which is all about 'getting franchising back on track'.

"Our research shows how the franchising system allows them to distribute profits at low cost from public subsidy.

"It would make sense to abolish the train operating companies and it would cost the taxpayer nothing if it were done as the franchises expired.

"Train and track operation could then be integrated under a new publicly-owned National Rail, operating within defined budgets over sustained funding periods," he concluded.

The Great Train Robbery says that:

* Train operating companies should be abolished as a crucial first step. This could be achieved within the next ten years as companies have relatively short leases with contract termination points and there is no requirement for shareholder compensation when the franchises expire.
* Train and rail infrastructure should be organised by a new not for profit company, National Rail, built around the core of Network Rail.
* Just as with Crossrail in London, the government should introduce a business levy to raise extra funds for the railways. The report estimates this could generate £21 billion a year.

Network Rail is mainly funded through direct government grant. Track access charges (rents) paid by train operating companies constitute around 25 per cent of its revenue. In addition, investment is funded through borrowing on capital markets. Network Rail debt currently stands at £30 billion and is projected to increase to £45 billion by 2019.

There are three ways in which train companies can receive taxpayers' subsidy; franchise payments, revenue support and indirect subsidies through the grant to Network Rail.

The full report, The Great Train Robbery, can be read here: www.tuc.org.uk/campaignplan

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