Insider

Risk of route closures.

It was not intended at the time of privatisation that passenger franchises would be the long- term solution to revitalising the use of the rail network. Their gradual replacement with open access operations was anticipated.

A different approach was adopted with freight operations. Here the plan was that there would be the sale of six companies with assets necessary to run the business, but in the event the EWS Railway was allowed to acquire all but one of the businesses that had been created. This left a market oligopoly with little initial competition, as Freightliner - the one company outside EWS control - did not have suitable assets for bulk or non-containerised distribution activities.

The passenger franchises were based on the businesses established by BR within its InterCity, Network South East and Regional Railways sectors. They were operations with very little asset content, as there was nervousness that no private sector expertise existed to value assetbased companies, so as a result the rolling stock companies were created. Even these were difficult to sell, despite the leasing revenue being largely guaranteed by the Government.

The low balance sheet value of the franchised businesses made bidding by management buyout teams a realistic proposition, and a number of these were successful. But as the process gathered momentum, the bus owning groups recognised the potential - particularly as there would be no competition from new entrants. This was an attractive proposition compared with the deregulated bus industry.

This was intentional in the short term, as the Moderation of Competition regime initially prevented competition on any flow that amounted to 2% or more of the franchise revenue. It was a disappointing outcome in terms of offering passengers choice in the market, and where new services were tried (for example, between Manchester Airport and Euston), they could not be made viable because intermediate stops (such as at Crewe) were not permitted by the regulator. Much later an attempt to provide Wrexham and Shrewsbury with through trains to London failed for similar reasons, as calls could not be made at Wolverhampton. Again, the regulator declined to intervene.

There was one open access operator from the start - Heathrow Express, on account of control over the airport infrastructure and an agreement with the airport owner to take over the train service on a longterm basis. It was not until the regulator relaxed the Moderation of Competition rules to allow franchises to protect only 80% of their revenue from competition that a window of opportunity opened. This led to the creation of Hull Trains and Grand Central.

The original regulatory intention was to reduce the level of protection from competition to 50% of franchise revenue, but by now the Strategic Rail Authority had no concern about monopoly operations. It believed that higher premium payments on the main routes would be the result, and operational simplicity that would improve train service performance.

“This is not the type of money that any Government would commit to risk investment.”

The customer benefits that increased competition would bring were a secondary consideration. This has, to all intents and purposes, remained the view of officialdom, with the Department for Transport consistently seeking to block market entry by new operators.

The most recent statistics show that the train operating companies (TOCs) made a net payment of £ 691 million to the Government in the 2016 financial year, with the highest contribution coming from South West Trains (£ 388m). Other big premium payers were Virgin Trains, at £ 358m, with East Coast paying £ 205m and West Coast £153m.

TOCs remain that receive support payment, headed by ScotRail (£ 293m), Northern (£ 249m) and Arriva Trains Wales (£ 98m), but the financial strength of the long-distance operators and those serving London and the South East absorb these losses with ease.

Government earnings from premiums will increase substantially in the remainder of Control Period 5 to 2019, and beyond that in CP6 to 2024, when account is taken of commitments given in recent franchise awards, such as for Greater Anglia and TransPennine Express.

These contracts reflect a belief that passenger revenue can be increased by product investment, particularly in new rolling stock. This is a feature that has resulted in a commitment to introduce more than 6,000 new vehicles by 2020, at a cost exceeding £10 billion.

This is not the type of money that any Government would commit to risk investment, given the need to fund very obvious priorities in areas such as health and social care, education and defence.

Although there are obvious worries about how the ever-increasing premiums will be paid for, they represent a commitment that contains protection for rail users. There is a guaranteed timetable, passenger charter obligations such as delay repay, and obligations for people with reduced mobility. There is also an incentive for cost reduction to reflect changing operational and retailing systems.

Would this framework continue without the profit incentive? In any case the franchised operators are not laughing all the way to the bank - the financial returns are tiny, with a margin of just 2.4% in 2015. That’s £ 233m on commercial income of £ 9.6bn.

Those who advocate the public ownership of franchises suggest that removing company profits would allow lower fares, but with current inflation of 2.3% a oneyear fares standstill would be the limit of any saving. And that assumes that the Government will have the expertise to manage the yield from fares and curtail any cost pressures. No one doubts that the state has important roles to play, but running commercial railways is not one of them.

The fear must be that if the financial performance of train operations erodes, there will be a search for savings. We’ve been here before, of course, with the closure of poorly performing routes under Government sponsorship.

Rural routes are weak financial performers, but the TOCs are required to run the services as part of their franchise contracts. Without this protection, they could be a target for closure by a Government that wanted to change how funds are allocated.

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