Rail finances
PHILIP HAIGH scrutinises the latest Office of Rail and Road publication of financial summaries for rail
Where is the money spent?
PAYING for the railway remains an expensive and emotive subject with passengers regularly complaining that fares are too high, unions complaining that money is being syphoned offshore, and taxpayers still paying for services they may never use (but likely benefit from).
The truth is inevitably more complicated and more nuanced than any single viewpoint.
Government policies play a major part. Successive UK governments have continued a long-standing policy of shifting the financial burden of the railways from taxpayers to farepayers.
This shows itself every year with above-inflation fare rises. Where once the split was roughly equal, now passengers pay around 80% of rail’s costs.
The second policy area relates to how Network Rail receives its money. Currently it’s split between grants from governments and track access charges from train operators. (NR also receives income from other activities such as rents from its properties.)
In the early years of privatisation, track access charges covered a much higher proportion of NR’s spending. Government channelled its contribution through the train operators (which made them appear to be highly subsidised). Then policy changed to switch government contributions to NR as a direct grant, which appeared to reduce the subsidy to operators.
The Office of Rail and Road’s recent publication of financial summaries for rail for 2018-19 shows that NR received 47% of its funding from governments (£3.8 billion from the Department for Transport and £0.3bn from Transport Scotland). NR’s income from train operators amounted to 26% (£1.3bn from running trains and £1.0bn from the fixed charge levied on train operators).
This exposes the uncomfortable reality that for all senior managers at Network Rail (such as Chief Executive Andrew Haines) talk about putting passengers and freight operators first, the money the company receives from them is the smallest of its three funding streams (its ‘other’ income was 27% of the total or £2.4bn).
ORR’s work also reveals that in England, train operators provided a slight surplus to the DfT while the government funds 18% of the infrastructure’s costs. In Scotland, the taxpayer provides 44% of overall income (split between 24% of train operator income and 19% of infrastructure income). In Wales, the overall funding split is 54% taxpayer (18% train operators and 36% infrastructure).
When examined from a train operator perspective, only c2c and South Western Railway covered their share of train and infrastructure costs. Three more - West Coast, East Coast and Greater Anglia - had overall government funding of under 5%.
Meanwhile, the taxpayer picked up the tab for over 50% of track and train costs at Northern, Merseyrail and the Transport for Wales rail operation. ScotRail and Caledonian Sleeper were just under 50%.
Network Rail spends money on operating, maintaining, renewing and enhancing the railway. Operating the railway takes
20% (£1.8bn) of the £9.3bn NR spent in 2018-19. Maintenance took another 17% (£1.5bn). Compensation payments to train operators under Schedules 4 and 8 (for planned and unplanned disruption to services) came to 7% (£0.7bn).
The rest of NR’s costs were attributed to depreciation (31%, £2.9bn) and financing (25%, £2.4bn). The financing costs relate to NR’s debts of £53.4bn (split between debts to government of 56% and borrowing from the private financial markets of 44%). It also includes a £0.3bn payment to government for insuring the private part of NR’s debt.
Much of NR’s growing debt (it was under £40bn in 2014-15) comes from upgrading its network, with projects such as wiring the Great Western Main Line. ORR
notes that NR spent £3.2bn enhancing the railway in 2018-19.
Overall, NR spending has increased by almost 33% over the past five years, with the bulk of the increase explained by higher compensation costs to operators. This is a consequence of its upgrade projects (which inevitably disrupt services by requiring sections of its network to close for engineering work) and a less reliable network (which prompts unplanned disruption). Taken over five years, the only area in which NR has cut its costs is in the controllable operating category, with a 15% fall.
For the franchised train operators, the vast majority (70%, £10.2bn) of their £14.5bn income came from fares in 2018-19 (open access operators’ fare income was £0.2bn). Fares income rose 2.6% over the year, with ORR explaining that this was largely because the railway was busier. Passenger journeys increased by 3.0%, while the average franchised passenger fare fell by 0.3% (to £5.81).
Franchise operators received £0.4bn funding from government - a change of £0.8bn from the overall surplus they paid the year before. ORR explains that this was not the result of performance problems but rather changes in the balance of NR’s grants and access charges.
The fares that train operators receive can be split into those that are controlled (regulated) by government and those that are not. Regulated fares comprise
36% of the total (season tickets 18%). Of the rest, First Class fares provide 8% of ticket income, anytime Standard Class 18%, discounted Standard tickets 35%. and unregulated standard season tickets 2%.
Dividends form only a small part of ORR’s analysis - it notes that in 2018-19, dividends formed 2.1% of fares income (down from 2.6% in 2014-15 and a peak of 3.0% in 2016-17). In total, train operators paid dividends of £218 million.
Of the 20 franchised or concession operators, 11 paid no dividend while the biggest payer was Great Western Railway, with £50m going to its parent company First Rail Holdings.
As this issue of RAIL went to press the accounts of First Rail Holdings were marked as overdue on Companies House’s website (they were due by December 31 2019). But it’s the same First Rail Holdings that is responsible for 70% of the onerous contract provision of £146m against South Western Railway’s account. SWR didn’t pay any dividend but had to borrow £28m from First and £12m from 30% owner MTR.
Likewise, Arriva’s CrossCountry operation paid a dividend of
£25m. But its other subsidiary, Northern, needed considerable financial support (which has now been exhausted, prompting DfT to take the franchise back in-house).
This suggests that for all the headlines about dividends removing excessive amounts of cash from UK railways to be sent abroad, they actually go towards running other companies under the same corporate umbrella.
The balance of public and private money could easily change. It is for governments to decide how
(or whether) regulated fares should rise. It is for them to decide whether money ultimately for NR is funnelled directly to the company or sent via train operators.
Sending it via operators will need ministers to robustly counter accusations they are increasing subsidies for private operators, but it might just concentrate more NR minds towards their customers, the train and freight operators.