Coal train passing Hatfield Colliery. Photo: Wayland Smith under Creative Commons
The rail franchise needs more than just a reboot
The current system of rail franchising leaves much to be desired. Passenger satisfaction is very uneven, and the system is not well aligned with the needs of the economy. Today, Campaign for Better Transport (CfBT) published a report on the state of Rail Franchising in the UK.
Since 1995 a range of private Train Operating Companies (TOCs) have competed for each rail franchise (there are currently 20), in a process overseen by the Department for Transport (DfT). Their performance is decidedly mixed with room for significant improvement. While profits for the rail industry have exceeded expectations when the system was devised, the industry underperforms on a range of other metrics.
The CfBT report calls for reform of the franchising system, but can’t we think bigger than that?
During the early 1990s rail use underwent a decline, though passenger numbers were beginning to increase again by the time the first privatised rail franchises began operating in the late 1990s.
The motivation of the franchising system was to minimise the costs of the rail system to the public purse. Since then, passenger rail (as opposed to freight) in the UK has experienced a resurgence. Average turnover of Train Operating Companies (TOCs) has more than tripled from £192m in 1998 to £744m in 2016. The train industry, which used to require a subsidy of £1.5bn in 1998/99 made a gross payment of over £1bn 2014/15. Intercity operators returned a total of c. £600m to the Treasury in 2016, equivalent to 2.5% of the Department for Transport’s (DfT) total operating budget.
Passengers might disagree
While the financial performance of the TOCs might have exceeded expectations, the same cannot be said for passenger satisfaction. The 2016 passenger satisfaction survey found that satisfaction with all rail operators declined from 83% to 81% between 2015 and 2016.
In addition, it should be borne in mind that the TOCs financial performance is still supported by the tax payer. They are not responsible for the upkeep of the rail infrastructure (more on this below). This infrastructure, without which the TOCs could obviously not operate, receives substantial tax payer funding. Total government support for the rail industry was £4.8bn for the year 2015/16.
Flaws in the Franchise
The strong financial performance has set up some pitfalls for the TOCs in the future. Recent bids have been predicated on strong revenue growth. But as the Better Transport report makes clear:
Such ambitious targets may prove challenging for operators – especially in the context of a slowdown in the rate of growth in rail demand over the last 18 months. if that does turn out to be the case the economics of the franchises means that the financial implications could be significant.
The majority of the industry is concentrated in a small number of large franchises. This leaves the supply of rail services vulnerable to shocks if a franchise gets in to difficulties; while winning or losing a franchise has a disproportionate impact on the financial viability of a TOC. Such high stakes do not encourage sustainable investment and long-term planning from successful TOCs.
This is exacerbated by the fact that the TOCs do not own the physical infrastructure of the rail system. The rolling stock (the physical trains), is owned by Rolling Stock Operating Companies (collectively known as ROSCOs), the tracks by Network Rail. The TOCs bid for right to the revenue from the service (minus whatever they have agreed to pay back to DfT), to decorate the trains they lease from the ROSCOs with their particular livery and to run any services provided on board (WiFi, buffet car etc.). Some of the larger TOCs are responsible for running some stations, but they do not own them. The TOCs themselves, for all the turnover they generate are somewhat insubstantial entities. This is a wasted opportunity to link improvement and maintenance to the regular process of awarding or renewing a franchise.
This produces the very patchy performance indicated above, and creates a wider failing in the national economy. The railway is a vital asset for the Britain’s economy, but it is also an important industry in its own right with a large and skilled supply chain. But the process of franchising the railways does not do as much as it could currently contribute to this, as it should. This is because there is no clear link between the franchise process and the needs of the railway system, and the wider economy.
What needs to change?
CfBT have called for the system to be reformed to ensure long-term planning and investment play a bigger role the process of awarding a franchise. This would certainly be an improvement, but can’t we think a little bigger?
The Public sector has already proven that it can successfully run a rail service. We only need to look at the success of the East Coast Mainline, before it was handed to Virgin, for evidence of this. The growth in rail travel indicates that placing the service in public hands could offer a vital revenue stream for the public sector, while providing long-term planning and committed investment in train services in Britain.
The railways represent a vital economic asset, and provide an essential service for millions. Yet, the planning and investment that would allow us to take full advantage of these assets are left to the vagaries of whichever largely unaccountable corporation successfully bids for the franchise.
UPDATE 04/05/2017: Thanks to RailNews.co.uk’s Sim Harris for some useful corrections and clarifications, which I’ve incorporated into the blog.