The Great Train Robbery

May 21, 2015 • Europe, Politics, UK

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How the taxpayer is duped into paying for a profiteering railway system


Since the privatisation of the British railways, the taxpayer has consistently borne the brunt of underinvestment, mismanagement and overall reduction in service. Yes, trains may come in a variety of bright and vibrant liveries but don’t let bright colours distract from the ‘the great train robbery’.

Let’s begin with Network Rail, the owner/operator of rail infrastructure in England, Scotland and Wales, employing 34,000 people and responsible for £6.3 billion in revenue since its creation from the ashes of British Rail. Neither the Office for National Statistics (ONS) nor the National Audit Office (NAO) can decide whether Network Rail is indeed a private or public company; with its debt obligations backed by the government one would think it was clear. Whether public or private Network Rail needs to learn from its predecessor’s failings: RailTrack’s safety record was one of the main causes of its demise. Yet the company in charge of maintaining the nation’s railways has been persecuted under the Health & Safety act as well as being fined over £5 million for incidents including the Grayrigg derailment (1 death); where defective points due to poor maintenance and inspection procedure led to an intercity train derailing at 95 mph.  As well as the death of two schoolgirls on a level crossing in Elsenham, Essex where it failed to act on recommendations made in a risk assessment made three years prior.

Network Rail’s financial control and management has also come into question. The £2 billion West Coast Main Line upgrade was intended to produce a high speed railway with top speed of up to 140 mph serving population centres of close to 40 million people. Instead, cost overruns, technology difficulties and poor management lead to far reduced capabilities, huge delays in delivery times and a spend rumoured to be closer to £10 billion,  five times originally estimated.

Network rail along with the Department for Transport (DfT) have colluded in exercises of remarkable incompetence. Their relationship with the Train Operating Companies (TOCs), the groups responsible for operating the trains and those bright decals has been controversial at best and collusion to defraud the public at worst.

In 2012 the West Coast Main Line franchise was put out to tender having previously been run by the universally popular Virgin Trains. Four bids were short listed, with Virgin Train’s perennial rival First Group awarded the franchise with a bid of £5.5 billion for the term. Richard Branson who’s Virgin Trains offered £750 million less which raised concerns that the winning bid from First Group would lead to reduced customer quality and raise fares, even offering to run the service for free (read no profit) for a year while the DfT reviewed their decision. He was turned down and the winning bid confirmed; so convinced was Mr Branson with his case that he decided to take legal action against the DfT’s decision.

In a scarcely believable turn of events a mere three days before the case was due to be heard the DfT decided to scrap the franchise award due to “technical flaws” in the bidding process. Three civil servants in the department were promptly fired and the cost of reimbursing the bidding parties believed to be close to £40 million. What quickly became apparent is Richard Branson had done something that the DfT and Network Rail were simply not capable of; performing due diligence on the First Group bid.

The flaws were obvious; Virgin the company responsible for running the line for more than a decade had an estimated 49 million passengers with a value of £4.8 billion, First Group on the other hand estimated 66 million passengers with £5.5 billion. First Group had estimated a growth in revenue of 10% despite the greatest ever revenue achieved by the franchise at the time was 6% and this was from a far lower base. The fear for many was that the First Group projection was unrealistic and would result in the franchise folding –  potentially meaning the government (the taxpayer) would have to step in.

A tax payer bail out of a privately run franchise sounds unfeasible? Think again. It has occurred not once but twice since privatisation. In 2005 Great North Eastern Railway (GNER) bid £1.3 billion for East Coast Main Line, which was the then largest financial transaction in European rail history. The company promised £100 million in upgrades to go along with its large contract; aiming to fund its expenditure by attracting more customers much like the First Group bid. Unions and railway experts proclaimed their reservations about the bid, yet GNER was still awarded franchise. Within a year the company was stripped of the franchise as it U.S. parent company got into financial trouble and could no longer afford to underwrite its losses, despite cutting jobs, raising fares and increasing parking charges at stations.

A year later one of the largest players in the British transport market, National Express Group won the right to run the franchise till 2015 with a bid of £1.4billion. They promised to spend over £7.4 million in station upgrades as well as to increase London to Scotland trains from 131 to 161 per week and introduce a brand new London to Lincoln service.

Despite these promising pledges, by November 2009 the franchise was under the control of the Department for Transport. National Express had lost £20 million in the first half of 2009 alone, with its position financially unsustainable the company tried to negotiate a change in terms with the DfT even eventually offering to buy itself out of its contract rather than continue to operate the line, according to the BBC. Eventually the going got tough and National Express Group got going rather than incur any further losses the parent group declared it would not provide any more capital leaving the DfT to step in. The bailout cost the taxpayer £700 million.

In the ensuing six years the ECML existed as a directly operated railway (DOR), a company formed as an instrument of last resort by the DfT at the expense of the taxpayer. Despite its slow start the now publicly owned railway grew into a successful operation, not only was customer satisfaction at an all-time high, but the franchise actually returned £1 billion to the public coffers via increased profits; even staff sick days were down. Yet in November 2014 the ECML was once again handed over to a private operator much to the dismay of passengers and the unions, in a Guardian poll nearly 90% of users asked wanted the franchise to stay in public hands. A Survation poll even showed 48% of conservative voters, traditional champions of privatisation, believed that the railways should be returned to the public.

Train operating companies profiteering isn’t simply limited to walking away from loss making franchises. In 2013 Network Rail paid TOCs £109 million for delays cause by infrastructure yet only £12.6 million was passed on to passengers through the delay repay system. This lead to Manuel Cortes leader of the Transport Salaried Staffs’ Association to declare the system “…blatantly rigged against the passenger”.

A report by Manchester University highlighted some of the failures in the bid-franchise system; since its inception Virgin Trains has paid £460 million to shareholders while at the same time receiving over £2 billion pounds from the government in subsidies. The same TOCs which claim to be investing in the railways to give passengers a better service had a meagre £219 million in capital invested, combined. They don’t even own their own trains, leasing them from other companies. That’s £219 million invested by the 22 private operating companies for the entire railway system in England, Scotland and Wales. For some perspective, Network rail has £34 billion invested for which it sees barely any return at just 1.34%, on the other hand the operating companies on average see a return of 21%, for every pound they invest they get £1.21 back. You may see some TOCs claiming they make a mere 2% profit from sales but this is disingenuous as it does not consider the subsidies received from the government thus return on capital investment is a far farer way to assess their returns.

In 1996 we were told privatisation of the railway would drive down the cost of rail travel and improve the service to passengers by increasing competition and choice. Instead we have seen prices rise by 22%, little to no competition with TOCs trying their hardest to keep open access operators away from their lines. The average age of rolling stock is now 18 years, 2 years older than the average in 1996.

In August 2014, The Telegraph researched the cost of rail travel across Europe on a cost per distance basis for same day tickets. It found that the price for journeys of 1-10 miles in Rome was £4.79, in Paris £9.60 and in London it was an eye watering £17. For journeys between 100 – 150 miles on the Italian railway it would cost on average £16, the French £29 and on the British railway £96. Of journeys more than 200 miles the Italians were paying on average £35, the French £54, meanwhile in Britain we are paying anything up to £125. At this point it is worth noting that while both these nations’ prices are considerably cheaper than here in Britain, our European cousins also get to enjoy true high speed rail for that price, whilst we are stuck with journey times that have barely shortened since the 1930s.

It seems that we the taxpayer are stuck with a railway system run by a department which has been proven to be wholly incompetent, overseeing a railway that fails to put passenger satisfaction first and foremost. A department which has been complicit in the profiteering of a few companies (nearly all of the 22 franchises are run by 6 transport conglomerates) who have monopolised their way to paying out dividends to shareholders, leaving passengers to foot the bill through above inflation fare rises which are already the most expensive anywhere in Europe. The railway is an industry in which the taxpayer provides the investment and the privately owned train companies take the profit.

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