finance

After privatisation: can Britain ever fix its railways?


John MacGregor never predicted that his gleaming vision of a privatised railway would end up bogged down in petty rows about the size of a peacock.

In 1994, MacGregor was the Conservative transport secretary when the UK’s railway network was sold off. An amateur magician, he did his best to conjure up a shimmering vision of plunging rail fares, increasing consumer choice and soaring investment.

Privatisation, he told the House of Commons, would harness “the management skills, the financial disciplines, the entrepreneurial spirit”. The old state-run British Rail — with its delays and stale cheese sandwiches — would be consigned to the history books.

But that vision of private sector efficiency and go-getting entrepreneurship did not quite work according to plan. Fast forward 27 years and MacGregor’s system is being torn up and rebuilt.

Stacked bar showing the importance of fares to UK rail industry income by showing Income by source as a percentage

A government “white paper” published last week painted a picture of a railway system hobbled by the byzantine structures created since privatisation.

The system now has almost 400 full-time staff called “train delay attributers” whose job it is to argue with each other about assigning blame for a delay. Nearly half of delays are subject to this blame game, meaning they have to go through an extensive adjudication process involving a 199-page principles and rules document.

The most bizarre dispute of recent years involved a debate about who was to blame for a train hitting a peacock. If it was defined as a small bird, then the company driving the train was responsible: if it was categorised as a large bird, then the blame went to the operator of the tracks. The two sides ended up haggling over whether peacocks were bigger than geese. (The answer: a peacock is a “large bird”.)

The government admitted in the white paper: “Franchise agreements typically covered around 1,000 pages; the Key Train Requirements document runs to 185 pages . . . the Ticketing and Settlement Agreement comes in at 922 pages, so it is no wonder that passengers find ticket pricing so confusing.”

Conservative transport secretary Grant Shapps said of the rail overhaul: ‘We are not ideological about this; we just want to do what works for passengers’
Conservative transport secretary Grant Shapps said of the rail overhaul: ‘We are not ideological about this; we just want to do what works for passengers’ © Charlie Bibby/FT

The man wielding the sledgehammer to rail privatisation is not a socialist from the opposition Labour party but another Conservative transport secretary, Grant Shapps. “We are not ideological about this; we just want to do what works for passengers,” he said.

Under the new system, private companies will still operate trains. But Shapps will scrap company franchises and centralise the running of the railways from a new body with the not unfamiliar name of Great British Railways.

This did not reflect a misplaced love of the old British Rail, he insisted. Shapps believes there is a misplaced nostalgia for the nationalised era. “Let’s not forget, passenger numbers plummeted year on year on year. They closed down thousands of miles of track,” he told the FT in an interview. “Stations closed and communities got cut off and they served diabolically bad sandwiches. That was actually what happened.”

A GWR train heads out of Bristol. The new system will scrap company franchises and centralise the running of the railways from a body called Great British Railways
A GWR train heads out of Bristol. The new system will scrap company franchises and centralise the running of the railways from a body called Great British Railways © PA

Rather, his plan involves a halfway house between full nationalisation and full privatisation.

But for critics, Shapps’s new plan will rely on as much magical thinking as the blueprint MacGregor unveiled in the 1990s. The government wants to simultaneously improve services while finding savings of more than £1bn.

Transport expert Christian Wolmar sees “one or two good aspects” in reducing the complexity and making it easier to plan investment and timetables. But he is sceptical that Shapps’ rosy vision adds up.

“There is supposed to be more saving, more spending and it is magic money tree stuff, isn’t it?” he says. “The very clear thing that wasn’t mentioned was any hope that fares would even stay the same let alone go down, and nor is there a proper rationalisation of the fares system.”

Line chart showing that people in UK have quickly returned to their cars while trains are still quiet

Rising costs

Rail privatisation has not been an unmitigated disaster. Its supporters can point to a doubling in passenger numbers over the 26 years leading up to the pandemic, making the trains busier than any time since the first world war.

But travellers were often left confused by the system of rival train operators with different ticketing systems and often wild variations in ticket prices. The overall cost of travel has raced ahead of inflation, while taxpayer subsidies have also risen as the costs of running the railways have increased.

The idea was that privatisation would unleash efficiencies that would justify the returns that private companies demanded.

Instead, fares have risen 48 per cent in real terms since 1997, when the process of privatisation was complete, and are much higher than many European systems. Meanwhile, passengers on many commuter journeys into London have to stand at rush hour. All while the government has spent £150bn on the network since the mid-1990s, according to the Department for Transport.

Shapps said he wanted to end the “spider’s web” of confusion, mistrust and adversarial relationships between state bodies and private companies for the past few decades.

Under the fragmented railway system, a state body called Network Rail ran the infrastructure, while multiple train companies delivered the actual services. That system superseded earlier attempts to run the tracks through a listed company called Railtrack, which collapsed in 2001.

Critics of the franchise system argue that the agreements offered generous revenue protection for operating companies in the event of an economic downturn. It also let them walk away with only a minimal financial cost — a situation that has happened repeatedly on franchises including the Northern and East Coast lines.

And the idea that competition would drive up quality and drive down prices has been left wanting: many of the franchises were given through “direct awards” rather than by auction. Many would argue that sandwiches are still not exactly prizewinning.

Andrew Adonis, who was transport secretary under the previous Labour government, is sceptical of the Shapps reforms. But he admits that the franchise system was far from perfect. “There were pluses and minuses. You can’t get away from the fact that the last 20 years saw the biggest increase in passenger numbers since the Victorian period,” he says. “Having private operators didn’t prevent growth. How far that stimulated growth is entirely up for debate.”

Tori Weightman drives her LNER train towards Newcastle. The new system will see taxpayers — not operating companies — taking on the risk of rising and falling passenger numbers and revenue
Tori Weightman drives her LNER train towards Newcastle. The new system will see taxpayers — not operating companies — taking on the risk of rising and falling passenger numbers and revenue © Charlotte Graham/Cover Images

Malcolm Rifkind, who was Conservative transport secretary before MacGregor, had reservations about the way that infrastructure was carved out from the operating companies.

But he strongly believes that privatisation led directly to a huge increase in passenger numbers and higher quality services: “It’s not just a theory,” he says. “You can say it’s a coincidence that privatisation happened and then there were these improvements, but I don’t think it was a coincidence.”

‘We compete against the car’

Drawing gloomy comparisons with other countries’ railways is a national pastime, but offers few straightforward answers. The Swiss railway is renowned for its timekeeping and efficiency and is in public hands, while Japan’s feted bullet trains are fully privatised.

The UK has to cram carriages on to ageing infrastructure built by an assortment of Victorian entrepreneurs with no central vision, while the French used more state planning from the beginning.

When judged on safety, quality of service and intensity of use, the UK is in the second tier of European nations, with a railway that ranks below the likes of Switzerland and France, according to analysis by Boston Consulting Group in 2017. Dragged down by its high fares and poor punctuality, the UK was in the same category as Italy, Belgium and the Czech Republic, the study found.

Passengers at King’s Cross station in London. The new rail system is based on the London Overground, the suburban rail network run by Transport for London which contracts Arriva Rail to run the trains
Passengers at King’s Cross station in London. The new rail system is based on the London Overground, the suburban rail network run by Transport for London which contracts Arriva Rail to run the trains © Dan Kitwood/Getty

The white paper, informed by former British Airways boss Keith Williams’s review, amounts to a sweeping admission that the way the UK’s railways were privatised has failed.

It makes two key changes that ministers hope will fix the problem while preserving private sector expertise built up over nearly 30 years. The franchising model will be replaced by management contracts, in a formalisation of an emergency system brought in during the pandemic. And Great British Railways will fix what many regard as the foundational sin of privatisation, and run both track and trains together in one public body.

“The adoption of a concession model is not just sensible but there was no alternative other than a completely nationalised industry,” says Norman Baker, a Liberal Democrat transport minister in the 2010 coalition government and adviser to passenger group the Campaign for Better Transport.

In the new system train operators will be paid a fee to run services to a pre-determined timetable and fare system, bringing the UK closer to regional services in Germany and Sweden, which both scored well in the BCG analysis. The contracts will incentivise companies to hit targets on passenger satisfaction, reliability and cleanliness.

UK rail in numbers

48%

Real-terms rise in rail fares since 1997 (all data: DfT)

54%

Of UK rail journeys in 2019 were for commuting to work

£12bn

Cost of keeping the railways running during the pandemic

Crucially, however, the new system will see taxpayers — not operating companies — taking on the risk of rising and falling passenger numbers and revenue. Only on the longest inter-city routes will there be a greater element of risk for the operators.

Given that private companies witnessed an overnight collapse in passenger numbers when the coronavirus pandemic hit last year, they are unlikely to want to take revenue risk for the foreseeable future.

“A little like the insurance industry, once the risk has materialised then the possibility of it happening again materialises and becomes a reality,” says Naomi Horton, a partner at law firm Ashurst.

The new system is based on the London Overground, the suburban rail network run by Transport for London which contracts Arriva Rail to run the trains to a tightly specified set of directions.

David Brown, the managing director of Arriva Trains UK, says the system works well but warns that a balance needs to be struck between operators knowing exactly what is expected of them, while still having some freedom in terms of operational decisions such as staffing levels.

Mick Whelan, general secretary of drivers’ union Aslef, believes ‘many in the industry’ are anticipating a future with ‘far fewer trains’ given the uncertainty over whether passenger numbers will ever recover from their pandemic lows
Mick Whelan, general secretary of drivers’ union Aslef, believes ‘many in the industry’ are anticipating a future with ‘far fewer trains’ given the uncertainty over whether passenger numbers will ever recover from their pandemic lows © Jack Taylor/Getty

“The model works because you are focusing on the right things, and then as private companies it encourages you to improve,” he says.

The hope is that the new contracts will provide the financial backbone to a joined-up system overseen by Great British Rail. “What you don’t want is train services competing with each other. They should be offering a service to customers which is the best use of track and train we have, and really compete against the motor car,” says Brown.

Commuter factor

In a sector not known for outbreaks of harmonious thinking, it is striking that nearly every part of the industry was united on the need for change. While the reforms have been broadly welcomed, industry insiders warn unity might fray as details including the new contracts are revealed.

Hanging over everything is the fact that no one knows how long it will take for passenger numbers to return to their pre-pandemic highs. If “working from home” is set to become part of everyday life, the answer could be: never.

Commuters on a C2C train head into Fenchurch Street station in London. When judged on safety, quality of service and intensity of use, the UK is in the second tier of European nations
Commuters on a C2C train head into Fenchurch Street station in London. When judged on safety, quality of service and intensity of use, the UK is in the second tier of European nations © Simon Dawson/Bloomberg

The white paper proclaims “a new era of public and private co-operation on the railways”, but some executives in the industry wonder whether a model that works in London, where most journeys are short, can easily translate into long-distance journeys linking cities hundreds of miles apart.

“Quite how the innovation of the private sector will be harnessed remains to be seen,” says Horton.

Having ploughed £12bn into keeping the railways running during the pandemic, ministers promise to save £1.5bn through “efficiencies” under the new system within five years.

They have also pledged to invest in infrastructure upgrades, including electrification, and insist that services will not be cut.

“If the ambitious aims of simplification, improved infrastructure and service reliability, together with cost savings, are all to be realised, GBR will need to implement significant change and show strong leadership,” says Andrew Brydon of law firm Pinsent Masons. “This will require large amounts of government funding to get it off the ground before it becomes clear whether long-term savings are achievable.”

The limited detail on how they will do this has led unions to warn of job cuts amid fears the entire network could end up smaller in response to declining passenger numbers.

A Greater Anglia railway worker waves a train off in Chelmsford. One former transport secretary suggests the reforms will ultimately ‘not make the blindest bit of difference’
A Greater Anglia railway worker waves a train off in Chelmsford. One former transport secretary suggests the reforms will ultimately ‘not make the blindest bit of difference’ © Chris Ratcliffe/Bloomberg

Mick Whelan, general secretary of drivers’ union Aslef, believes “many in the industry” are anticipating a future with “far fewer trains” given the uncertainty over whether passenger numbers will ever recover.

His fears were hardly allayed by one rail executive, who declined to be identified but who argues there are too many trains in some parts of the country. Politicians will need “nerve” to make cuts to these services, according to the executive.

Meanwhile, some passenger groups worry that the focus on changes could distract from the bid to encourage people back on to trains. Fares rose above inflation this year, and Shapps has warned they could rise further.

While flexible season tickets will offer modest discounts to tempt those commuting for just a couple of days a week, Baker says he detects “the heavy hand of the Treasury” in limiting any giveaways.

“I have tried to argue with them and say the way you cut your costs is to get more people on the railway . . . don’t price them off because that’s your income stream. The Treasury don’t seem to get this,” he says.

Adonis suggests that the reforms will ultimately “not make the blindest bit of difference” and are instead a minor rebranding of the system in Union Jack colours.

“I don’t think this changes the privatisation arrangements apart from they are replacing one control model for private operators with a different control model,” he says. “The thing that will make the biggest difference in the next five years will be subsidy levels. That is going to be the biggest factor, given that passenger levels are unlikely to come back to their previous levels for a long time.”

Wolmar says the shake-up brings with it significant political risk for Boris Johnson’s government.

“I somewhat suspect, a year or two down the road, we’ll have these GBR-branded trains but fares will still be high, there’s still going to be complexities about when you can travel and when you can get an advanced ticket, there will still be high top-end fares if you just jump on a train at 8am,” he says.

“People are going to get cross about this. Who are they going to blame?”



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