Paul Salveson on de facto state ownership and its problems

The rail privatisation experiment – brave or foolhardy depending on your view – is over. The railway infrastructure, comprising land, track, signalling and stations, is already state-owned, run by Network Rail. Some franchised train operations are now run by the state-owned ‘Directly Operated Railways’ and the rest are state-controlled, with the private operators running under an ‘Emergency Measures Agreement’ (EMA) to cover catastrophic drops in ridership and revenue since the pandemic. Of course, many of the ‘private’ operators are state-owned already, but it’s the German, Dutch, Chinese or French state, not ours. The only remaining ‘private’ operations are a handful of ‘open access’ services such as Hull Trains and Grand Central, and freight. In addition, there are a large a number of private suppliers – the most significant being the rolling stock leasing companies, owned by banks.

So does that all mean that rail nationalisation is a done deal? Not quite, but nearly. The EMAs expired on 20th September and have been renewed for a further 18 months with ‘Emergency Recovery Measures Agreements’. Essentially, the agreements provide for continued funding of train services operated by the private operators, with an allowance for ‘profit’ which, with the introduction of ERMAs, has been revised from 2% down to 1.5%. This could possibly lead to some of the owning groups (which include First, Go-ahead, Stagecoach, Arriva and Abellio) saying ‘thanks, but no thanks’, and returning to the less complicated job of running buses.

So what happens then? The picture across the UK reflects growing devolution. The ScotRail franchise is managed by Transport Scotland on behalf of the Scottish Government, which has already given notice to Dutch-owned Abellio that the franchise will end early and ScotRail will return to the public sector. The Welsh Government, through Transport for Wales, controls the franchise contracted to French-owned Keolis. Merseyrail is managed by local government-owned Merseytravel and London Overground is a contract let by Transport for London. What remains is managed by the Department for Transport (DfT), which is accountable to the secretary of state, Grant Shapps.

The Government knows that rail privatisation is unpopular and is in the position of being able to take a few risks that won’t upset its own supporters. Last year it commissioned the Williams Review on the future of rail, following the shambles of the 2018 timetable change. The review, chaired by Keith Williams, has been much delayed and there are suggestions that some of its recommendations will be quietly shelved. What is emerging as an increasingly likely prospect is for Network Rail to take control of pretty much everything – which could include a future, reformed, franchising system.

It would mean returning to a centralised operation controlled from London, at least as far as England goes. There are arguments for it – railways form a strong national network and some projects need strong central planning. However, there are downsides. The old BR, whilst permitting regional ‘devolution’, was in essence a central bureaucracy. Going back to something like that (as proposed by the Labour Party rail policy paper I reviewed a few months ago) would risk throwing out a lot of babies with their bathwater.

The franchises that have worked well – and some have – share certain common features, such as Merseyrail and Chiltern. The key element is long-termism. Most rail franchises have been set for 7-10 years; railways don’t work to those sort of timescales and it’s a rotten way to retain staff and consumer loyalty. Secondly, they are quite small. Big, rambling franchises covering vast areas have proved difficult to manage. Northern is a case in point but other factors led to its demise and return to state ownership. Compare that with Merseyrail, which covers a clear geographical area and is directly accountable to the regional public body, Merseytravel. London Overground, covering local services across Greater London, has also developed a good record and is accountable, ultimately to Sadiq Khan through Transport for London.

So the solution is? Keep the size of future rail companies quite small, though not too small; and have them there for the long term, with a degree of commercial freedom. Regional railway companies have worked very well in Germany, with a single intercity operator. It’s not a bad model. Ownership is less important than size and objectives but an unorthodox Tory Government might see attractions in not-for-profit companies running railways, learning from models such as Welsh Water. It makes sense for Network Rail to continue as the infrastructure owner but to cede day-to-day responsibility for track and other upgrades to the railway companies. Leave freight alone, it’s doing OK and just needs greater incentives which recognise its green credentials. The rolling stock leasing companies are a bigger problem and the best pragmatic solution is for the railway companies to buy their own trains, unless an opportunity arises to buy out the leasing companies, which would be costly. There is a need for a single ‘guiding mind’ that can safeguard network benefits – but not a ‘controlling mind’.

Now is the time to think differently and not see a return to either failed franchising or an equally discredited system of centralised state ownership.


The online version of this article has been updated to reflect the changes to EMAs on 21st September.

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