The railways weren’t really privatised, so why not renationalise?

Our trains require massive investment if they’re going to keep pace with demand, and we should begin by reducing building costs

Chris Blackhurst
Wednesday 30 September 2015 17:24
On the move: the new line
On the move: the new line

In France, they’re working flat out to complete the new Paris-Bordeaux high-speed rail line. It will cost around €7bn (£5.2bn). Here, we haven’t started building HS2, linking London and the North-west. The Department of Transport predicts it will cost £43bn, although the Institute for Economic Affairs reckons on £80bn.

You don’t need a currency exchange calculator to gauge that the French service is a whole lot cheaper. To be fair, once the environs of Paris are breached, much of the journey is through open countryside – compared with HS2’s path through our overcrowded island. But even so, constructing new rail infrastructure is more expensive in this country than elsewhere (30 per cent more, on average).

When we look at the railways and their future, when politicians of the left go all nostalgic about returning them to the public sector (now official Labour policy, as Jeremy Corbyn had his plans formally backed at the party’s annual conference), it’s these figures, arguably, that are more important. Britain is crying out for an improved rail system. Its roads are packed, and trains are jammed. The cheap solution is to add more carriages, although that’s also easier said than done given the length of platforms.

What’s required is extra lines, affording faster services and greater capacity. Heralding the end of privatisation is a nice twist, but unless massive investment is forthcoming, it’s hard to see how it will make much difference, without development costs being drastically reduced.

It always was a botched privatisation by John Major’s government, 20 years ago. The state held on to the tracks, while operations were farmed out to a variety of private, time-limited franchisees. The result was chaos. Ticketing became crazily complex, in an attempt to create competition, and standards between the train operators varied drastically. Just getting the myriad companies to talk to each other and agree anything was difficult. No single person was identifiably in charge of Britain’s railways, and far from being able to wash its hands of trains, the Department of Transport is spending more time than ever managing the network, thanks to having to sort out the franchisees and their differences.

Despite the confusion, user numbers have soared. In 1995-96, trains carried 761 million passengers; in 2013-14, it was 1.58 billion. That compares favourably with the rest of Europe – only Austria has enjoyed higher passenger growth. But the level of public subsidy has also grown. In 2013, MPs on the Transport Select Committee reported: “Although the level of government support has varied from year to year, in general it has increased from around £2.75bn (in 2011-12 prices) in the late 1980s to £4bn today.”

Compared with the difficulty of privatisation, renationalisation would be relatively easy to achieve, and it would cost relatively little, perhaps nothing. All the Government would have to do would be to wait for the licences to expire, not reissue them, and take them back into the public sector. A third of the franchises expire before May 2020.

But Labour is impatient, and this week it passed a motion seeking to introduce break clauses, allowing the state to gain immediate control of franchises “in the interests of passengers”. While that would accelerate the renationalisation programme, it could prove expensive. The simplest formula would be to take the franchisee’s annual profits and multiply them by how long is left on the contract.

Each year, the train companies make a combined profit of around £300m, according to a study by the accountancy firm KPMG, and a margin of just above 3 per cent. That surplus is little changed, says KPMG, since 1997. But that’s not the public perception. The widespread view is that the operators constantly raise their fares at above-inflation rates, and that they’re raking it in. This, after all, is the prime motivator behind the desire to take them back into state ownership.

Support for that argument comes from the industry’s Return on Capital Employed, a key business statistic determining how much a business gets back for every pound it puts in. The answer for the railways, from analysis by the Centre for Research on Socio-Cultural Change at the University of Manchester and the Open University, is £2.47. For every £1 the rail barons invest, they’re able to extract £2.47. That’s a percentage return of 147 per cent, and would suggest the train operators are making money hand over fist: that they can get away with putting little in and reaping far higher profits.

This, though, takes no account of what is a tightly regulated industry. If a train firm makes too much, it must hand a proportion – up to 80 per cent of the surplus – back to the Treasury. If its revenues are too small, the Government steps in with the subsidy, which again can be as much as 80 per cent of the shortfall. This “cap and collar” formula of taxing success and underwriting failure is based on the company forecasting how much more money it expects to bring in from the franchise. If it’s below target after the fourth year, the government steps in to help; if it’s ahead, then it must pay something back. The charge that franchisees are making vast sums that could otherwise go into boosting the railways is not so clear-cut.

Our trains require massive investment if they’re going to keep pace with demand, and we should begin by reducing building costs. The East Coast Line was electrified on time, and on budget, by British Rail. Contrast that with Great Western, where the line is electrified only from London to Heathrow. We need an electric line to the West Country, just as we need high-speed to the North-west. If renationalisation reinstalls a cadre of managers who can beat up suppliers and produce the best deal for passengers and taxpayers, then all well and good.

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