Fare enough
Smoke and mirrors of how the rail network is financed
The railways are good value for money – at least that is what the train companies will tell you. In real terms, train prices have increased by an average of 4.9pc each year since 1998, the Rail Delivery Group (RDG), which represents train operators, claims. Compare this to gas prices, RDG says, which are 84.6pc higher. Meanwhile, electricity bills have risen by 39.1pc and water costs have increased by 14.9pc over the same period.
Yesterday’s announcement of a 3.2pc price increase in January will no doubt rile passengers. Forced to use a network plagued by strikes and signal failures, not to mention several attempts at a bungled timetable overhaul, recent consumer research places train companies as the country’s second-least trusted businesses.
Those forking out a not insignificant proportion of their salary on train travel have seen fares rise an uncompounded 42pc over the last 10 years, compared with an 18pc increase in nominal weekly earnings, according to the Trades Union Congress (TUC).
Consumer groups have been up in arms this week at the expected rise, castigating “rip-off” increases which are “not justified”. The Department for Transport (DFT) – which, in theory, is the ultimate arbiter on rail ticketing – conceded that a fare rise was “unwelcome”.
Chris Grayling, the Transport Secretary, has written to operators and unions, saying he wants to see “lower levels of increases for passengers in the future”. Annual fare rises are linked to the Government’s previous official inflation measure, the retail prices index (RPI). Grayling wants to see fares pegged to the current official rate, the consumer prices index (CPI).
The problem with such an adjustment, however, is that many of the rail operators’ costs are linked to RPI. Take wages, which represent a quarter of the train companies’ budgets. Hard-fought battles have resulted in long-term deals generally linking to RPI. Grayling is effectively asking the operators and unions to rip these up and start again.
So without an agreement from all stakeholders, a shift to CPI would upset the current equilibrium that sees annual day-to-day running costs of £10.3bn covered by £10.5bn of fare revenue. The RDG claims that just two pence in every pound goes to train companies’ bottom lines, while the remainder is spent on services.
The only alternative would be to go back in time 20 years when day-to-day annual costs totalled £7.3bn against fares of £5.3bn. The £2bn shortfall was funded by the taxpayer. This does not seem to be something the DFT wants to do. As a spokesman said earlier this week: “[It is] not fair to ask people who do not use trains to pay more for those who do.”
The important word included in this quote is “more”. The taxpayer already pays at least £4bn for the running of the railways. But instead of going directly to the rail companies, it is paid to Network Rail – the company operating the country’s tracks, signal boxes and other infrastructure. As Liberum analyst Gerald Khoo explains: “There is still subsidy to the overall system via Network Rail, which is subsidised by the Government, as well as being owned by the Government.”
Network Rail does not just benefit from the £4bn grant income from the DFT. The state-backed company is sitting on a debt pile of £51.3bn, equivalent to half the annual NHS England budget, according to its March 2018 accounts.
Half of the borrowing is formed of multiple tranches of corporate bonds, which attract substantial interest charges and loan repayments. Without the necessary funds to meet such payments, Network Rail was last year handed a further £6.7bn by the DFT in a taxpayer-funded loan. It now owes the department £26.8bn.
If this isn’t too mind-boggling, Network Rail must hand over large sums to rail companies for service delays. Train operators stung Network Rail with a £258m bill in the 2016-17 financial year, to compensate for planned and unplanned delays. Only £73.6m of this was handed back to rail customers, through so-called “delay repay” compensation over the same period.
Khoo, meanwhile, agrees with companies’ claims that in aggregate rail businesses’ running costs are funded by fares. The problem, he says, is that “the train operators don’t pay enough in track access charges to fund the upkeep and upgrading of the infrastructure”.
If this isn’t enough, there is another dynamic that could stoke further anger among rail users. The RDG figures are aggregated. Fare increases on some networks may not be needed to cover costs, but compensate for fares that fail to cover costs elsewhere.
Khoo says: “Passengers in some parts of the country – on franchises that pay premiums – are subsiding passengers elsewhere, on franchises that receive subsidy.”
Identifying winners and losers on a network-by-network basis is tricky. The premiums paid by franchisees to the Government are deemed “commercially sensitive” and not made publicly available. But taking the country’s largest network – Govia Thameslink (GTR) – as an example, billions of taxpayer pounds have been poured into upgrading operations and overhauling London Bridge station.
Moreover, it is the only major network in the country that does not function on a franchise model.
Because of the level of public investment needed, GTR is paid a management fee by DFT and passes the fares over to the Government. So if fewer people travel on that network, the taxpayer misses out further.
As Mick Whelan, the boss of rail drivers’ union Aslef, dodged questions earlier this week on whether his members would be prepared to adjust pay deals from RPI to CPI, he made one pertinent point: the financing of the country’s beleaguered rail network appears to be a case of “smoke and mirrors”.