What next for Britain’s broken railways?

Successive Conservative administrations have quietly and reluctantly renationalised large parts of Britain’s railways in a process that was accelerated by the impact of the pandemic, reversing a 30-year legacy of privatisation.

But the industry is on the cusp of significant reform, with both politicians and industry bosses agreeing a wholesale rethink of the railway’s structure is needed, whichever party wins the election expected this year.

Almost 40 per cent of passenger mainline rail travel in Britain is now by trains directly controlled by the state, after ministers were forced to bail out privatised operators as they ran into trouble in recent years, according to an FT analysis of official data.

Emergency measures introduced in 2020 at the start of the pandemic have also ripped up the franchising model that lay at the heart of rail privatisation and was designed to encourage operators to maximise revenues in return for a slice of any profits.

It has left ministers and civil servants responsible for the financial and operational decisions of all rail operators, whether or not they have been renationalised. Train companies are reduced to contractors running services to a timetable determined in Whitehall.

“This can’t possibly be a sustainable way of managing the rail system going forward,” said Andrew Haines, boss of Network Rail, the state-owned infrastructure body, who also heads up the Great British Railways Transition Team (GBRTT), a new interim public organisation set up in 2021 to bring management of train and track back under one roof.

“It is a level of direct government control being perpetuated that is literally without precedent in my lifetime. Much more so than British Rail,” he added, referring to the former UK state-owned rail company pre-privatisation.

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With the status of the railways in flux and suffering from long-running strikes, passengers have seen a sharp fall in service. Some 5 per cent of trains were cancelled in the last quarter of 2023, the worst performance since at least 2016.

“The system could work a lot better . . . the railways are in limbo,” said Chris Page, chair of Rail Future, a campaign group which represents rail users.

Should Labour win the election expected this year — it holds an average 20-point lead in the opinion polls — the industry would be formally nationalised, albeit only gradually as the majority of contracts come to an end during the next parliament.

The Conservatives have also pledged to bring in significant structural changes if they defy expectations and form the next government. These include formalising Great British Railways as a public body with a mandate to cut state subsidies by giving train companies greater commercial freedoms while also aiming to reprivatise nationalised operators.

Whichever party wins, the biggest challenge will be reversing the substantial fall in passenger revenues triggered by the pandemic and exacerbated by the subsequent collapse of high-margin commuter and business traffic.

According to the latest data available from industry regulator the Office of Rail and Road, fare income had recovered to 68 per cent of pre-pandemic levels by the end of March 2023. More recent traffic figures show that passenger numbers returned to 82 per cent by the end of last year.

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Like other large national networks, Britain’s railway has long relied on some level of public funding, with much of it channelled through Network Rail to maintain and upgrade the existing infrastructure.

But when the pandemic hit in early 2020, ministers were forced to provide huge subsidies to keep passenger services running. The FT calculated that in the three years to April 2023, the government spent £23bn to plug the losses from ticket sales. This contrasts with a net £3.8bn returned by franchised rail operators to the taxpayer over the decade to March 2019.

Many regional operators, including ScotRail in Scotland and Northern, which mainly serves northern England, have long required government support.

But under the system brought in during the pandemic, the government pays all train operators a fee — typically between 1 to 2 per cent of their cost base — to run trains to tightly specified instructions.

Industry executives said this leaves them with no incentive to grow traffic or flexibility to respond to changing travel patterns. 

“What we have got is a stop-gap system no one thinks is working,” said Andy Bagnall, of Rail Partners, a lobby group for private train operators.

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The system is further hamstrung by tight government control over the railway finances. The Department for Transport sets the budget for train operators a year in advance, which prevents them from reinvesting any revenues generated from ticket sales to respond dynamically to changes in demand.

The head of one rail operator said the arrangement meant he could not put extra trains on a popular route even when the data showed they would have generated a profit.

“The contracts were meant to be very flexible and uber dynamic, but because of the general financial challenge, and secondly the split of cost and revenue they have ended up not being at all flexible,” Haines said. 

Although transport secretary Mark Harper last year acknowledged the existing set-up was “nonsense” and “mad”, the government’s reform agenda has stalled. The glacial pace is epitomised by a three-year gap between the publication of a policy document on rail reform in 2021 and the draft legislation in February this year.

The draft bill has been welcomed by many in the industry. It would create Great British Railways and give it powers to put train services back on a commercial footing.

“We just need a clear path forward . . . I think we need to look at [the reform debate] as an opportunity to find the things that we need to do differently to move forward,” said David Brown, head of Arriva’s UK train business, which runs two national rail contracts, and the chair of RDG, the industry trade body.

“You need a body that is away from day-to-day political involvement, but can be business-like, and harness the value of the public and private sector,” he added.

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The government said it had “set out a clear plan for the future of our railways”, which would “make the most of industry expertise while putting passengers and freight customers first.”

But Harper has acknowledged the reforms are not a government priority, which means the draft bill is unlikely to get any further before the election, leaving question marks over the future role of private operators. 

Labour leader Sir Keir Starmer has pledged to fully nationalise the rail industry. This has the support of the unions, which have long campaigned against privatisation and disrupted services for the last two years in a dispute over pay.

“We support the creation of an integrated, unified, publicly owned railway. This would unite track and trains in a single publicly owned company,” said Mick Lynch, general secretary of the RMT union, which settled its dispute late last year.

Labour has indicated it would set up a similar public body to Great British Railways but would not contract out the running of services to private companies. Louise Haigh, shadow transport secretary, insisted the party would enshrine rail nationalisation in its manifesto later this year.

“Under the Tories rail reform has stalled and we are on a train to nowhere,” she told the FT. “Labour will end this cycle of failure by bringing rail franchises back into public ownership as contracts expire.”

Many industry executives are frustrated by the lack of detail in Labour’s plans and have warned against completely excluding the private sector, particularly on long-distance routes where there is scope for competition between operators as well as airlines.

Bagnall said privatisation had worked, with passenger numbers doubling between the mid-1990s and 2019 and the number of train services up by a third.

“We would call on all decision makers to be pragmatic. It is not a binary choice of public versus private; if we get it right we can get the best of both worlds,” he said.


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