From the TUC

The Great Train Robbery: ATOC dispute our findings on rail privatisation

07 Jun 2013, by in Public services

The Great Train Robbery is a new report launched today by the TUC and the CRESC team at the University of Manchester. Part-funded by the TUC, this new report adds to the growing evidence base on the failures of privatisation. Over 160 pages, the University of Manchester team have provided forensic analysis of the numbers behind privatised rail.

Unsurprisingly, we have found that rail privatisation has spectacularly failed to deliver on the promises made by John Major’s Tory government at the time of privatisation. Large scale private investment, innovation, cheaper fares and more efficient use of public money have all failed to materialise.

The Association of Train Operating Companies (ATOC) has put out its own response today which we find very interesting.

Keynes justified one of his many changes of position by saying “ when the facts change, I change my mind” ; ATOC ‘s variant justifying their persistence might be “ when our claims are refuted, we repeat our old line”. This is the response of Michael Roberts, Chief Executive of the Association of Train Operating Companies on their web site:  

“Britain’s railway has been transformed in the last 15 years, thanks to the public and private sectors working successfully together to deliver for passengers and taxpayers. By introducing competition between train companies to run services, government has ensured operators have played a crucial role in reversing the fortunes of the railway by motivating them to attract more passengers. Significant investment plus an industry focused on encouraging rail travel are generating record levels of revenue to pay for more trains, faster services and better stations.”

Or again, here is Edward Welsh from the Association of Train Operating Companies who  told ITV Daybreak that the TUC is being “naughty” in claiming that rail privatisation has led to the UK having the most expensive fares in Europe. He said:

“We have a choice of different fares, it’s like airline discounting, you are able to buy cheaper fares if you book in advance or use a rail card and often on the continent you don’t have those kind of benefits.”

The ATOC claims about increasing passenger numbers and discount fares are refuted by our detailed analysis in the CRESC report web site. Here you can see detailed evidence and argument about fare structures and the drivers of increasing passenger numbers. If fare comparisons are complicated by differences of structure, the old ATOC claims about increasing passenger numbers are plainly wrong.

Here are three reasons from the report as to why the TOCs cannot take the credit for increasing passenger numbers.

First, the secular increase in passengers dates from the 1980s before privatisation.

Second, the main driver of increasing numbers is GDP growth, which the TOCs have admitted by lobbying to have a GDP mechanism in franchise agreements.

And third, two thirds of the increase in passenger numbers is in London and the South East which of course fits with the GDP driver explanation.

Apart from this we get the old rhetoric about “public and private sectors working together successfully to deliver for passengers and taxpayers” This fine sounding claim is comprehensively refuted by the CRESC analysis of how funds move around a subsidised system so that the TOCs get a low cost option to distribute profits created by public subsidy because the tax payer directly funds operating deficits and is liable for investment costs. ATOC response does not confront the report’s argument and evidence about how privatised rail ways are levered on the state.

Since 2002 a not for dividend statutory corporation Network Rail has financed large scale new investment in rail infrastructure through a massive increase in debt which is an (off balance sheet) public liability.  By 2012, the tax payer was liable for £30 billion of NR debt mainly in the form of public guarantees on private bonds which NR has sold and cannot repay out of income.  Network Rail is now spending more on servicing this growing debt than on railway maintenance .

Worse still, Network Rail is inflating the profits of the Train Operating Companies by lowering the track access charges or the rents it charges TOCs for using infrastructure. Despite increased usage and investment in improvement, the sum raised in track access charges has declined to £ 1.6 bn in 2012 from £3.2 bn in 1994. This indirect and hidden subsidy through undercharging has grown to be nearly twice as large as direct government subsidies which have declined.

As Network Rail supplies the infrastructure (and trains are leased from ROSCOs) a TOC franchise is a low investment cost option to distribute profit. This is lucrative when it comes good as on the West Coast main line. Here Virgin and Stagecoach have, in return for a £21 million initial investment (and helped by more than £2.5 bn of direct subsidy) found £519 m of profits and, in line with general TOC practice, almost all of this (£499 m) was distributed as dividends.

Many franchises are not so lucrative. But they are all low risk because franchise contracts have always included break points which give every TOC the option to walk away from obligations like future premium payments by paying a modest penalty and with no claw back of previously distributed profit. Thus, from 2005-11 successive franchises extracted £50 million in dividends, before First Greater Western walked away in 2011 and reportedly avoided £ 800 mill in payments due over the next three years.

The TOCs cannot increase passenger numbers but they do make optimistic forecasts of passenger numbers in their franchise bids. Dividend extraction followed by walk away to avoid payments due is embedded because the DfT has allowed TOCs to game the system by accepting optimistic passenger forecasts and “back loaded” bids for franchises where most of the premium payments are due in the last few years of the franchise.

The real scandal of the First West Coast main line bid of 2012 was not that civil servants miscalculated but that the DfT was prepared to accept a bid where the premium payments were as back loaded as in previous failed franchises

GUEST POST: Karel Williams is a professor at Manchester Business School and director of the Economic and Social Research Council funded Centre for Research on Socio Cultural Change whose independent research is commissioned by a variety of different organisations. Their publications can be downloaded from cresc.ac.uk

One Response to The Great Train Robbery: ATOC dispute our findings on rail privatisation

  1. The Great Train Robbery: ATOC dispute our findings on rail privatisation
    Jun 8th 2013, 12:53 pm

    […] by a variety of different organisations. Their publications can be downloaded from cresc.ac.uk This article was written by Karel Williams for touchstoneblog.org.uk on 7th June 2013 VN:F [1.9.22_1171]please wait…Rating: 0.0/10 (0 votes […]