31 January 2023

Our railways have gone badly off track – but there is an alternative to total renationalisation


As we face another week of train strikes, it’s difficult to get one’s head round a longer view about the future of the railways. It is, however, worth trying.

Last year’s Shapps-Williams report was meant to provide just such a long view. Unfortunately it was largely drafted pre-Covid, since when demand for rail services has shifted and revenue sharply fallen. The ‘Great British Railways’ title for the planned ‘single guiding mind’ authority may be dropped, as it is seen in the industry as a piece of Boris-era puffery. More concerningly, the development of this new organisation seems to be proceeding very slowly. It looks likely to be dominated by Network Rail people, rather than train operators, and to focus on imposing a rigid national timetable.

In the meantime the Department for Transport, which squeezed the life out of the franchise system, has set up management contracts for train operating companies which guarantee a minimum income but offer no real incentive to boost growth or efficiency. As the operating companies decide the game isn’t worth the candle, the in-house Operator of Last Resort seems to want to absorb more and more former franchises into the nationalised sector.

The much-criticised franchise system was not an altogether bad idea. In its early days there were considerable successes, such as Virgin’s introduction of fast modern Pendolinos on the West Coast Main Line. Then there was the redoubling of track which enabled the most consistently successful franchise, Chiltern Railways, to boost services to Birmingham (and later to Oxford). More generally, the reintroduction of the profit motive to the railways led to a doubling of passenger journeys from 1997 to 2019.

The failure of some individual companies are an inevitable feature of private enterprise, but folks needs reminding that the most publicised failings were largely the fault of state-owned Network Rail, whose delays wrecked Virgin’s East Coast operations, and the Department for Transport, which operated a flawed bidding system for franchises and laid down such increasingly restrictive conditions that most genuinely private businesses dropped out. This has bizarrely left much of our train operation in the hands of organisations owned by nationalised railway operators from the Netherlands, Italy, Germany and so on.

The new passenger service contracts involve the DfT specifying routes, ticket prices, timetables and other aspects of services. The train operating companies collect fares for the Treasury, and receive funds from the DfT to cover their costs. A modest mark-up is permitted; in the case of the Govia-Thameslink contract, just 0.5%. Although there are some performance-related bonuses available, these are unlikely to link in a straightforward way to productivity or to growing the market. As with most bonus systems, the award criteria will presumably be set to limit payouts to pre-determined budget allocations.

The unions and the Labour Party – and now increasingly it seems the Conservatives – want to return to a fully nationalised railway. Those of us with long memories don’t see this as likely to improve the service for a travelling public increasingly disenchanted with government’s ability to run anything at all.

But it doesn’t have to be this way. There are less heralded areas of private rail operation which are successful without government subsidy and micro-management. They could be built on.

One is freight: freight companies are privately-owned, for-profit companies – four large ones and three smaller ones now handle a growing quantity of heavy goods. They rent track slots (‘diagrams’) from Network Rail and own or lease their own locomotives and (usually containerised) wagons. Post-Covid, freight companies have introduced innovative services which take heavy goods vehicles off the roads and reduce carbon emissions. One example is DB Cargo bringing fruit and vegetable from Valencia through the Channel Tunnel for Tesco.

Freight is the Cinderella of the railways. It has not enjoyed sufficient attention from the DfT. Some key routes are still single-track, restricting capacity, and reliant on diesel rather than electric traction. Timetable slots are difficult to fit in on busy passenger routes, for example the West Coast Main Line, which carries 40% of all freight traffic. In the continuing whingefest about HS2, it has rarely been noted that one advantage – admittedly, there aren’t that many – of the new route is that it will relieve the capacity constraint on freight movements.

Another example of successful private rail operation is ‘open access’ passenger trains. On the East Coast route, Hull Trains and Grand Central have long been popular with travellers, offering cheaper and often more convenient travel in competition with the state-operated LNER. Recently the service from London to Edinburgh has seen new competition from Lumo, another private operator whose distinctive blue-liveried trains have taken a large chunk of the market from air travel to the Scottish capital. A new service is also planned to compete with GWR between Carmarthen and London.

Open access operators, like freight companies, hire slots from Network Rail. There would be more of them, but the DfT would only allow them to run services if they could demonstrate that they would expand the market rather than simply take market share and revenue away from the franchises (which of course were often paying the DfT good money to run a monopoly service).

With the ending of the old franchise system, this ‘revenue abstraction’ argument is less compelling. A report in the Autumn from Rail Partners, a pressure group of open access operators, argued for a much greater role for private enterprise. This might conceivably involve some key corridors like the West Coast Main Line being entirely open access areas, with private firms competing for passengers rather than having franchised or government-contracted operators. While it is unlikely that the whole network could be run on this basis, it’s certainly an idea worth pursuing seriously.

Wherever we go with the railways in the future, it’s important that we don’t turn the clock back to the state monopoly model of the 1940s and 1950s. Private sector involvement brought in new investment, new ideas and grew the market dramatically in the years following privatisation. The model adopted at the time was flawed, but babies shouldn’t be thrown out with bathwater.

To return to our current problems, the reason why we have continuing national strikes at the moment is because the DfT, rather than individual operators, holds the purse strings. Under the franchise system, disputes were with a single operator rather than the government, and the rest of the system could continue to function during industrial action. If no meaningful reforms are made to union powers, at least breaking up concentrations of economic leverage – and possibly avoiding the total wipeout we are experiencing this week.

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Professor Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.