And so the Great British Railway Rake-Off rolls on

Network Rail’s £34bn debt has helped private companies to make huge profits. And now we’re ordered to pick up the bill

• 
• • Aditya Chakrabortty
  • The Guardian, Monday 1 September 2014 18.30 BST

'If the sums don’t work out, an operator can do the business equivalent of binning a runny baked Alaska by walking away – just as GNER did with the east coast main line.' Illustration by Daniel Pudles

Congratulations, dear reader! As of this morning, you have racked up an extra £539 in debt. No, you haven’t just bought a new wardrobe. You haven’t made a deposit on a winter break. And it’s not because of that heavy eBay session where you overbid for a signed Bulgarian copy of Wet Wet Wet’s first LP.

Nor are you alone. I’m another 539 quid in the red too – as are each of the other 63 million Britons. Put all those sums together and the entire country has just lost £34bn. How did we manage that? The short answer is that some statisticians made it so. The Office for National Statistics has decided that, under new accounting rules, Network Rail can no longer be called a private company. It was always borrowing on the state’s behalf, and if anything went wrong with Network Rail, it was always going to be taxpayers who would be on the hook. So as of this week it goes on the public balance sheet, its £34bn of debt now indelibly inked next to our names.

Nor would you be alone if you haven’t heard about these extra tens of billions taken out in your name. It hasn’t come up much in the papers, or on the BBC. You might think that strange, given the huge amount involved and all those vows made by George Osborne about getting public debt down.

Then again, the hush fits perfectly with what that £34bn represents – because it’s hush money. It’s part of the secret subsidy that you, me and everyone else in Britain has handed over to the train operators to keep them in business. For years, Network Rail has been shelling out for new railway lines and stations refurbs using public money. The fruits of our generosity have been enjoyed by the private train businesses.

On this very page last August, Ian Birrell attacked critics of rail privatisation for not seeing the commuting miracles wrought. “When I travel from London to watch my football team, Everton, play at home, the average journey time to Liverpool is now 37 minutes quicker than when rail was privatised.” Well, yes, Ian: that’s because taxpayers paid £9bn for the privilege.

What’s more, Network Rail has also been keeping down track access charges – the rent that Arriva, TransPennine and the rest pay to use our railways. All this, by the way, is on top of the cash the government hands out directly to each of the firms.

Imagine having a landlord who did up your flat, chucked in a wetroom and some top-of-the-range white goods – then reduced your rent, so that he was really paying you to live there. You have just dreamed up Britain’s privatised rail network. Except it’s not all that private. Instead, you could call it the Great British Rake-Off: the state makes the investment; the train firms and their shareholders rake off the cash. And if the sums don’t work out, an operator can do the business equivalent of binning a runny baked Alaska by walking away – just as GNER did with the east coast main line.

For the rest, there are some lovely returns. Last winter, I asked academics at the Centre for Research on Socio-Cultural Change to tot up how much firms such as Virgin and First Group were making. They reported that in the financial year ending in March 2012, for each pound train operators invested, they were making £2.47 back. As I said at the time, find a bank account paying you that. That stupendous return on capital employed, as accountants refer to it, tells us that train companies invest very little but get a lovely flow of cash to send back to shareholders.

We’re meant to get into a choreographed huff about train fares. I can see why, when they’ve gone up 25% since Cameron took office. But to me, this is the greater scandal: the way we’re paying for private companies to make millions. The final kink in the system is that, from Arriva Trains Wales to London Overground, more and more of Britain’s train services are now run by German, French and Dutch state rail companies, who presumably direct the revenue from our fares back home. So taxpayers and commuters in the UK are paying for rail users on the continent to enjoy lower fares and better services.

If this is privatisation, I’m Richard Branson. All that’s happened this week is that the ONS has decided to end the charade. But what convolutions Labour and Tory politicians have gone through to stave off this day. Rather than criticise Network Rail bosses as they got stuck into the bonus trough, transport secretaries have kept mum so as not to demonstrate any public control over this pretend-private entity.

Rather than take democratic control over our money, the public is relegated to the role of a bystander. Despite embarking on a £38bn public-spending programme, despite heading for £50bn debt, Network Rail has no shareholders, and little parliamentary oversight: it is run by a small board who are supervised by 51 unelected lay members. This is of a piece with the manner in which Gordon Brown’s government practically killed itself to save RBS and Lloyds – then put its stakes in the arms-length UK Financial Investments, headed by a succession of bankers on sabbatical.

So, the Great British Rake-Off. It’s got TV potential: a true saga of how an entire political class pretends it has privatised the railways, even while pouring public money into the pockets of the privateers, then pretends otherwise to the public. Promises, pretence, subterfuge. And a ruddy great mess at the end.

Why do UK rail fares keep rising?

With train companies, Network Rail and the Government involved, the answer is far from simple

Fed up: protesters against a rise in rail fares in King’s Cross Station Photo: AFP/Getty Images

By Christian Wolmar

7:47PM GMT 02 Jan 2013

 

Here we go again. It’s a new year but an old story. Commuters are up in arms about rises in rail fares and they’re looking for someone to blame.

Aside from the fact that central London was half empty yesterday and finding a seat on a train would have been no problem for most, they have a good point. This is the 10th successive year of above-inflation fare rises, and there is no sign of any change in policy coming until the next general election at least, and probably well beyond that.

But finding the right target for passenger anger is made difficult by the fact that transparency is not a feature of the rail industry and railway economics remains a dark art. The train companies, the Government, previous governments, and even Network Rail (responsible for the track and infrastructure) are all in the frame for blame. And actually, all of them deserve at least a bit of buckshot, if not a high-velocity bullet.

The railways may have been privatised in the mid-Nineties, but in reality they are a mix of private and state interests, with most of the purse – and other – strings still being pulled by the Government. Forget the notion of a raw capitalistic enterprise with energetic entrepreneurs seeking innovative ways to fleece the public: the train operating companies are pretend capitalists who have very little room for manoeuvre and invest very little. They complain that they make only a 3 per cent profit – or around £250 million annually – yet that is a misleading figure, based not on investment, as with a conventional company, but on turnover.

The train companies will receive a proportion of the extra fare income that yesterday’s rises generate, thanks to an opaque process that began last summer. Once the fare rises (which are based on July’s inflation figures) are known, the Department for Transport (DFT) and train companies begin negotiations over how the spoils should be divided. This is because rising fares will deter some passengers from travelling, and under the franchise agreements the DFT has to compensate the private companies for this loss.

However, given the recent inept performance of the DFT over the West Coast franchise, it would not be reckless to suggest that perhaps the train companies get rather more of this extra dosh than they need to cover any passengers lost as a result of the rises. The projections and the sums of money that follow are, of course, “commercially confidential”, and therefore not released to the great unwashed British public.

There is a real irony here. The legislation to regulate season tickets and off-peak fares was designed, at the outset of privatisation, to protect passengers from greedy private companies exploiting their monopoly position. Originally, the rises for “regulated” fares were set at the RPI measure of inflation minus 1 per cent, as a way of encouraging rail travel. In fact, since 2003 – when the formula was changed by the Labour government to RPI plus 1 per cent – the legislation that supposedly protects consumers has been used against them.

However, the situation with unregulated fares – which represent about half the income of the train companies – is completely different. Train operators are free to set all other fares, which include the very expensive peak fares on intercity and other routes, first class and advanced, and all of the increase will go to them.

For their part, the train operators argue that the extra revenue from unregulated fares is needed in order to meet the financial arrangements that come with the franchise deals – most of the train companies pay an annual premium to the Department for Transport. They say these unregulated fares are set commercially because operators face competition from airlines or the roads. But many people making occasional journeys at peak times have no option but to travel then, and are therefore heavily penalised for their lack of flexibility.

A spokesman for the train operators justifies the situation by saying: “Train companies have to meet tough financial commitments agreed with the Government when franchise agreements are signed.” It is also the case that since 2007 there has been a cross-party policy of increasing the share of the cost of the railways paid by rail users, which is now around two thirds, compared with less than 50 per cent six years ago. Yet this does not negate the fact that the train operators decide the level of unregulated fares and many have gone up far more than regulated fares. A peak return from London to Manchester in standard class, for example, is now a stunning £308.

Provided the DFT gets its sums vaguely right, the Government therefore will receive a substantial proportion of the money from increased fares. Ministers’ explanation for the rises is that this money will be used for investment in the railways – but the relationship between investment and fare rises is a distant one.

In fact, the amount of investment going into the railway for extra capacity such as improved track and better signalling is determined by a complex process of negotiation involving Network Rail, the Office of Rail Regulation and the Department for Transport. Ministers set out an investment programme in five‑year periods – the current one runs out in March 2014 – and allocate funds accordingly, and then the Office of Rail Regulation assesses whether enough money is available to carry out the plans. Network Rail then undertakes the work, primarily through contractors.

New trains are provided through a different, and similarly tenuous, relationship. The Government will determine that there is a need for new trains and build this into franchise contracts. The trains are then leased, with the operators paying for them out of their income from the fare box and any subsidy they receive from the DFT. However, the level of fare rises is not linked to the acquisition of new rolling stock. As one angry rail traveller tweeted yesterday: “Why should I pay more to travel in Lincolnshire when the services and rolling stock are so bad?”

Overall, then, there is very little relationship between yesterday’s fare rises and future investment plans. Indeed, for the past two years, the Government, in the face of public pressure, has backed down from proposed fare increases of RPI plus 3 per cent to the current RPI plus 1 per cent, which has resulted in a reduced income of around £250 million annually – enough to kick-start an investment programme of, say, £2.5 billion. Yet there has been no suggestion from ministers that this cut in fares income will reduce the amount available for investing in the railways.

The position of Network Rail – a state-owned company in all but name – adds to the confusion. It spends around £6 billion a year on maintaining the railways but has been sharply criticised for excessive costs. A report in the spring of 2010 by Sir Roy McNulty, the former chairman of Short Brothers, the airline manufacturer, identified wasted spending amounting to 30 per cent.

Network Rail is therefore being required to cut costs; McNulty reckoned it could save £1.8 billion by 2019. Justine Greening, who was Transport Secretary until the autumn reshuffle, argued that if these reductions were made then fares could, in future, be held steady, but few industry insiders believe that such big cuts could be made without compromising performance or safety.

So the real blame for the fare rises must lie with us, the passengers, and our appetite for rail travel. Ever since the early Nineties, passenger numbers have kept on rising steadily. Remarkably, even the long-term trend of passenger numbers falling during recessions has been reversed, as numbers have continued rising except for 2009-10, and even then the fall was very small.

The one way to ensure that fare rises are lower in the future is for more people to shun the railways and use the alternatives – or simply not travel. While numbers keep rising, even in times of recession, why should either the train companies or their political masters change the policy?

Christian Wolmar is a writer and broadcaster specialising in transport.