The case for re-nationalising Britain's railways

Labour leadership hopefuls Jeremy Corbyn and Andy Burnham have both spoken of re-nationalising the UK’s railways. National ownership of such a crucial piece of a country’s infrastructure is the source of much debate. But the evidence suggests that integrating the UK’s expensive and fragmented rail network under public ownership could save hundreds of millions and also provide a better service.

At a smaller level, Transport for London shows the success of an integrated network run by the public sector. If a similar model was applied to national rail all profits made in the sector would be reinvested, fares could be cut and government subsidies reduced. This compared to how costly and inefficient privatising the national rail network has been.

Public support

The latest two YouGov Surveys indicate majority support for taking rail back into public ownership. Opposition to the idea has fallen from March to August.

The overwhelming reason for this is a belief that rail fares would go down as a result. For example a YouGov Survey of 2014 found the top three reasons for re-nationalising the railways were:

• Railways would be accountable to the taxpayer rather than shareholders.
• Rail fares would go down.
• It would be more cost effective overall.

Only a third think ticket prices would go up under public ownership. Half think the fares would fall.Survation - May 2014

The belief is justified. In 2013, journey prices were 23% higher in real terms than in 1995 (the year rail was fully privatised). Research by Transport for Quality of Life indicates creating a unified publicly owned railway could save enough to fund a 10% cut on regulated fares, which constitute half of all tickets sold, including season and day return tickets.

This month trade union campaigners Action for Rail suggested regulated fares rose 25% between 2010 and 2015 alone. Prices have risen fastest on long distances, which are often unregulated.

A costly experiment

Today’s part public, part private system is a reflection of the Great British rail privatisation experiment. The 1993 Railways Act split responsibility for physical rail infrastructure and the train services. Railtrack, a for-profit company, took on infrastructure and the passenger rail network was split into 25 companies, each to be run by the private sector.

Infrastructure has since been returned to public ownership. After four fatal rail accidents around the millennium exposed Railtrack’s dangerous under-investment in infrastructure and spiralling project costs, Network Rail, was created, a not-for-dividend company to replace it. Its high dependence on subsidy and government-guaranteed borrowing then required its reclassificaion from a non-profit company to a central government body.

Total rail subsidies have increased from around £2.75 billion in the late 1980s to around £4 billion today. An integrated network could reduce excessive costs of fragmentation through cooperative working, coordinated planning and knowledge sharing.

Total subsidy to the rail network in each financial year. Subsidy include Network Rail and Train Operating Subsidy 1995-2012. Prices shown are 2012 prices.House of Commons Transport Committee (2013) Rail 2020 - Seventh Report of Session 2012-13

There has also been significant growth in Network Rail debt from £9.6 billion in 2003 to £34 billion in 2014, which has grown in an effort to upgrade the under-invested infrastructure inherited from Railtrack but also due to debt services. With Network Rail now a central government body it can borrow through the Treasury rather than from the City – which is slightly cheaper.

Passenger rises

In terms of the rail network, privatisation was meant to bring “higher quality of service and better value for money”. But the hope for private sector management efficiency so that the system could run without subsidy has not been fulfilled.

As the graph below shows, not at any point in recent history has the British railway network managed to cover its costs. On average, passenger fares have made up 60% of total rail income in the past 25 years – peaking at 85%. The 1992 White Paper on rail privatisation, drafted to inform the 1993 Railways Act, recommended that rail infrastructure remain publicly owned as there was no record of profitability.

Passenger fare revenue as a percentage of total GB rail system revenueA Bowman (2015) An illusion of success: The consequences of British rail privatisation

Supporters of privatisation point to the growth in passenger numbers as evidence for its success. But passenger revenue has not been able to cover costs, despite this significant growth which has outstripped European peers.

Yes, passenger numbers have risen – average annual passenger numbers rose 4% between 1997 and 2012 compared to 1.73% between 1982 and 1996 and the annual journeys per head rose from 14.9 in 1997-98 to 22.4 in 2010-11. But the rise in passenger numbers is arguably symptomatic of wider trends such as urbanisation, centralisation of employment and non-car lifestyle choices, particularly of millenials, rather than credit to the privatisation of the rail industry. These lifestyle changes are reflected by growth in the frequency of journeys over individual journey distances, as shown below.

Overall gowth in rail passenger travel per person 1995 - 2010Le Vine and Jones (2012) On the Move

The route to nationalisation

Britain’s railways could be taken back into the public sector one piece at a time, at no cost. As franchises expire, contractual break points are reached or franchises under-perform, routes could be taken back into public ownership. By 2020, eleven current franchises will expire.

Source: Department for Transport - Rail Executive (2015) Rail franchise Schedule July 2015

An integrated rail network could grow as shown in the map below if franchises were taken back under public control as they expire.

N Badstuber. Original map: Barry Does (2015) 2015 Great Britain National Rail Passenger Operations - 31st edition. Franchise expiry dates: Department for Transport (2015) Rail Franchise Schedule July 2015

Savings to be made

Nationalising the railways has the potential to bring a number of obvious savings to the UK government.

1. Shareholder dividend payments

The latest dividend payments by the train operating companies amounted to approximately £200m a year. Instead of being paid to shareholders this amount could be reinvested into the railway and reduce the taxpayer’s contribution.

2. Subcontrators

Transport for Quality of Life estimates that £76m a year could be saved on private subcontractors by creating the staff positions in house.

3. Bidding costs

Under the current system, the various train operating companies bid to run each rail franchise. The problem is, central government ultimately pays for the costs involved in these bids. The train operators are not directly reimbursed for the incurred cost of bidding, they will recoup it by factoring it into the franchise price. So scrapping the bidding process would cut this cost, which was conservatively estimated to be £15-20m per franchise competition in 2010 (though the competition for Great Western’s services in 2012 cost a total of £40m).

So, if three franchises are up for renewal a year from now until the end of 2019, between £45m and £120m could be saved by scrapping these competitions and managing the rail routes under one umbrella.

4. Administration costs

If the franchising system was abolished, more than £2m a year could be saved on in-house Department for Transport administration costs. Cutting the external consultants and contractors involved in franchise specification and procurement would save the department an additional £4m a year.

Additional savings could be reaped from an integrated structure such as getting rid of duplicate senior management and marketing.

Thus, the case for re-nationalising all of Britain’s railways is a strong one. Privatisation has proven extremely costly and an integrated national network would be better value for both consumer and government.

Nicole works on LSE Cities' New Urban Governance project which is funded by the McArthur Foundation. Nicole's PhD studentship is funded by the UK Engineering and Physical Sciences Research Council via the Transforming the Engineering of Cities for Societal and Planetary Wellbeing Research Programme (Liveable Cities). Nicole sits on the London Transport Expert Panel of the Institution of Civil Engineers.