Chris discusses the prospects for a post-Williams rail network in which revenue risk – and therefore the entirety of fares policy – will revert to the government…
With the ‘will he, won’t he?’ question now answered over HS2 and other funding announcements for future transport projects out of the way, attention must once again turn to the outcome of the Williams Review of passenger rail franchising. The report was supposedly imminent in December but postponed because of the General Election, but still had yet to emerge at the time of writing.
This doesn’t stop further leaks and speculation about what will be proposed. And the consensus seems to be that a new version of OPRAF/SRA will take over the running of the network from DfT Rail on a more arm’s length basis, letting concessions to run services as opposed to the current franchises. The main difference, it is suggested, being that the contracts will be let on a ‘cost plus’ basis, with revenue risk remaining with the new government body – with heavy emphasis placed on incentives/penalties for performance.
This is similar to the way in which the London Overground and Crossrail contracts are let by Transport for London which, it is argued, have delivered higher levels of performance than the revenue risk model operated on most of the rest of the network. Advocates of the system point out that not having to worry about revenue risk frees the management to focus on quality, since that is the means by the operator can earn additional income or avoid penalties.
There are, however, downsides to such a system – both from a customer and a taxpayer point of view. The first is the danger that handing control of all fares to a single, Government-funded body will result in a less flexible, more rigid system promoted on the back of ‘simplicity’ – stifling innovation and increasing the cost of millions of journeys.
Secondly, the change could well end the tentative moves towards the introduction of more competition on the network – both between existing train operators but also by killing off open access operators. This would particularly be the case if, having created a new public body to manage the train services alongside an infrastructure operator that is already in the public sector, the opportunity was taken to remove any independent economic regulation of the industry.
Thirdly, such a system would inevitably maintain close and detailed control by the public sector of timetabling and service provision, alongside rolling stock provision. Since these are the issues where the existing system has been most criticised, it would still leave too much power in the hands of public sector officials in Whitehall (albeit with some moves towards devolution – though of course without the control over funding that is necessary to make local decision-making work). This would not end the micro-management that has been a consistent criticism of the current system since 2005 and would again stifle innovation and competition.
The fourth concern is that it would not end cost creep. Operating costs, and particularly labour costs, have tended to rise at rates higher than inflation – even rising in real terms when wages were falling in other industries. Managing contract bids, using assumptions provided by the client, mean that it is compliance with the budget plan that matters rather than constantly striving to reduce costs.
Issue number five concerns the government’s ongoing willingness to provide revenue support to those parts of the railway network that still need it. Recent events in Northern Ireland offer a worrying sign of the way things might go. There, the state-owned transport operator seems to lurch from one financial crisis to another, despite achieving strong market growth and value for money – simply because governments in Belfast and London do not deliver the necessary levels of funding.
To those of us who have previously worked for the nationalised transport industries in the past, this is a depressingly familiar story, which may well get replicated in London if nothing is done to resolve TfL’s funding shortfall. The only consequence is service cuts, increased fares or other cost savings which impact on the quality of the product. We’ve been there before too many times in the years since 1945.
Between them, the three big regional franchises received £862 million of revenue support in 2018/19 (that’s aside from Network Rail funding). The Northern and Welsh franchises currently enjoy average train loads in the mid-fifties and Scotrail in the low sixties. That’s around a quarter of the figure seen on the busiest InterCity routes, and roughly one third of the level seen on the London commuter franchises. This means that a very great deal of quite rapid growth would be required to make those services self-funding. Meanwhile, providing additional capacity to cope with the growth that is already happening on these routes actually puts the subsidy bill up in the short term: that is a funding trap that we must be wary of.
Providing capital funding for rail reopening schemes is all very fine and nice, but we need to remember that those routes are unlikely to be commercially viable in the short term, and provision needs to be made for ongoing revenue support too.
For the last few years, the subsidy issue has been buried because premiums paid by profitable TOCs have exceeded the costs of subsidy. However, in a changed regime, that may no longer be the case, and with all government revenue expenditure subject to ongoing scrutiny, it is likely that these ongoing costs will come under the microscope, as they did in the early 2000s.
If the railway industry is to play its part in helping to deliver the shifts in transport demand needed to tackle climate change, we need to forge a railway network that is forward-looking, enterprising, flexible and dynamic. We need to remember that each one per cent of demand switched from private car to train means a 13 per cent increase in rail demand or a 17 per cent increase in bus demand. In a situation where the government envisages reducing private car use by ten per cent, the challenges to be faced by our public transport operators in the next decade or so are huge.
Unlike many, I am by no means convinced that increased public sector control of the railways (or indeed the buses) is the correct solution to the issues currently faced, much less the future demands that are going to be placed on the network.