Reintegrate UK rail network by bringing franchises into the public sector

Robert Jupe, professor of accounting and public management at the University of Kent.

Following a National Audit Office report, which highlighted the disripution caused by infrastructure problems and issues with the rail franchise system on the Govia Thameslink network, professor Robert Jupe looks at the challenges facing Britain's railways and how best to finance the network moving forward.

The latest report by the National Audit Office (NAO), which scrutinises public expenditure, highlights continuing problems with the privatised rail franchise system. Britain’s integrated nationalised rail industry, British Rail, was fragmented and privatised in the 1990s and there was a vertical separation of train operations from the rail infrastructure. Periodically, train operations are awarded to rail franchisees following a competitive bidding process which was intended to improve efficiency and quality of service, reduce costs and, in the long run, eliminate subsidy. In practice, however, total rail costs have doubled in real terms since privatisation, efficiency savings have proved hard to deliver, and the combined annual subsidy of nearly £4bn to the train operators and the infrastructure provider, Network Rail, is still far larger than that ever received by British Rail.

The NAO report focuses on the disruption for passengers in the Govia Thameslink franchise, the largest of the 15 franchises managed by the Department for Transport, which brings together four rail services Thameslink, Southern, Great Northern and Gatwick and is an overseas subsidiary of France’s state-owned railway. The NAO report criticises the department’s management of the franchise, noting that over the three years from September 2014 its passengers experienced ‘the worst service performance on the national rail network’.

While accepting that industrial action contributed to delays and cancellations, the report criticises the department for devising a "complex and ambitious" franchise, for not seeking "sufficient assurance that Govia Thameslink would have enough train drivers" to operate the franchise, and for not having "a good understanding" of the underlying condition of the rail network used by the franchise. It concludes that the department’s decisions "negatively impacted" on passengers, and that to date it has not "achieved value for money from the franchise". 

As well as performance issues, there have been a number of examples of over-optimistic bids for franchises where the bidder has been allowed to walk away from the contract. Last November, it was agreed that Stagecoach/Virgin would be relieved of the East Coast franchise in 2020, rather than 2023, after their over-optimistic winning bid which promised £3.3bn in payments over eight years proved to be unsustainable. This has happened twice before with this franchise, in 2007 and 2009.

The Labour government then established Directly Operated Railways to manage the franchise under public ownership. Despite infrastructure problems, there were improved levels of customer satisfaction and punctuality and the State-owned operator, which did not have to pay dividends, was more financially successful than its private sector counterparts before or since. The ideological commitment to privatisation, however, means that this effective solution has not been readopted.

Although still subject to jibes about its sandwiches, British Rail in the decade before privatisation undertook a long and painful business-focused reorganisation which left it one of the most efficient railways in Europe. The fragmentation and privatisation of the integrated rail network was supposed to improve efficiency further, and to remove both the need for government intervention in the industry and for subsidy.

Paradoxically, the continuing problems of the railways, particularly those of the franchises, mean that there is now far more government intervention than under nationalisation. Further, the rail franchising sector, which was supposed to unleash the benefits of competition and private enterprise, is now dominated by subsidiaries of three overseas state-owned railways, those of France, Germany and the Netherlands, which benefit from British government subsidy.

The fundamental problem with financing rail is that, as a highly capital intensive industry, it is very difficult to cover the costs of both the infrastructure and train operations from fares. This dilemma has been critical for rail under both private and public ownership. British Rail came closest to resolving the dilemma before its privatisation by undertaking major organisational reforms which lead to very significant improvements in productivity and punctuality.

Rather than maintaining the fiction that the railways are 'profitable’, when they still depend on subsidy, the government could reintegrate rail by bringing franchises into the public sector at no cost as they expire or run into difficulty, and merging them with Network Rail which is already in the public sector. 

Robert Jupe is a professor of accounting and public management at the University of Kent.