The Annual Explanation of Rail Fare Increases

Why are the private companies being allowed to increase fares again?

It’s not so much a case that they’re being allowed to as that they’re being told to. Any company simply transferring all the money that rail fares are claimed to have gone up by into increased profits would by now have bought out the Government and taken over the world.

Rather, the Government has a target to cut the cost of the rail industry to the taxpayer and transfer it to the farepayer, instead of spending taxes on services which some people aren’t using. (Since I haven’t voted for the Government for over two years, haven’t used a NHS hospital for five and haven’t been in fully state-funded education since 2006 I personally resent the idea that the Government is taking my money to spend on these things. However, for some reason there is less political consensus on transport to hospital being free at point of use than that the hospital giving you drugs that you’re allergic to and sending you home should be free at point of use.) This is a very easy target for the Government to meet, since it involves no effort on their part. They simply get the train operators to calculate what an inflation plus x% increase in their revenue amounts to and deduct that from the grants that the Government makes to train operators for them to pay their track access fees to Network Rail.

In short, your fare increase is an immediate saving to the Government and has no impact on the profits of any part of the rail industry. The fact that you do not notice any equivalent drop in your taxes is not a matter for train operators.

What’s the big aim of these increases?

In the long term the industry will be largely subsidy-free; once it is, on balance, self funding one hopes that the Government will stop interfering in fare policy. (It will probably actually impose fare caps which everyone will cheer about until the industry goes to the wall and the whole cycle starts again.)

Being subsidy-free is the easiest way to eliminate the risk of a future Government deciding to cut costs with line closures. What is not currently being acknowledged is that fitting an average of 34 more people onto every train in the country (average fare per mile is 20p and average Government cost per mile minus debt interest is £6.80) will be a tricky exercise to say the least. The cost to the Government is currently being pruned through other means, mostly by bringing things in house when the outside company’s profit margin exceeds the cost of employing staff to do the job.

There is also a widespread industry effort to avoid having to implement any more cost-cutting proposals suggested by outside parties, so McNulty is being delicately rubbished (his comparison railways, for example, don’t operate many unremunerative rural branchlines and so offer little expertise in that field other than in closing them) while other cost-cutting options are explored.

Why has this got worse since privatisation?

“Got worse” is debatable. The original idea after privatisation was an annual fare increase of the Retail Price Index minus 1%. This was sat on by the Labour Government, which reckoned that it was inhibiting efficient provision of services and effective cuts in subsidy. (Labour had other important things to spend the rail subsidy pot on, like wars and MPs’ expenses.)

However, rooting out a news report on railways from almost any time in the last 80-odd years is likely to produce some kind of complaint about rail fare increases.

Costs have risen since privatisation – and they have since fallen again – but fare increases have remained. This is largely because British Rail (BR) wasn’t covering its costs either, so fares have been steadily rising in a bid to cover costs as fast as politicians dare raise them.

Why can’t we renationalise the railways and run them as a public service?

If you find a political party with a history of doing this then I will refrain from writing you off as living in a utopian cloud cuckoo land.

Labour nationalised the railways largely on ideological grounds about the following points:

  1. Anything the private sector could do, the public sector could do better.
  2. The railways were a large industry capable of doing immense damage to industrial enterprise if handled incorrectly and so the Government should ensure that they were controlled.
  3. Public sector ownership would allow profits to be shared out amongst the staff and any surplus passed to the Treasury rather than dished out amongst shareholders.

Unfortunately regulation laid down over the years to fulfil point 2 had become so successful that there hadn’t been any profits for the shareholders for over ten years, ensuring that there were also no profits for the staff. Nonetheless, the staff still got their pay rises and then discovered that the Treasury, anticipating profits, had made no provision to financially support the ruined industry.

To the bitter end, British Rail was expected to make a profit except where services were maintained at the minimum viable cost to provide social services. Accordingly, the network operated by the public for the public did so on the fatal assumption that the public did not actually use its services and therefore should not be expected to pay for them except on a one-off basis at point of use. This raises certain queries as to why the public should wish to own a network which they do not use, and indeed as to who uses all these overcrowded trains if not the public, but remains policy for the two parties likely to form a majority Government in this country.

The Southern Railway fancied modernising and maybe even electrifying its line to Plymouth for the benefit of its shareholders, but British Rail and the Labour Government of the time reckoned that the public would be much better served by closing it. This is Shillamill Tunnel near Tavistock.

Indeed, in the 1970s everyone’s favourite pro-public service railway, dear old Labour (then in Government, apparently for the last time to date if their rail pronouncements are anything to go by), told the West Midlands Passenger Transport Executive to stop offering its ludicrously cheap fares provided with public subsidy and instead charge something closer to what the market would bear – rather than viciously and unfairly undercutting the private car. The more marginal Labour voters appear to have responded by voting for Thatcher. Fares still rose, but the West Midlands also got its suburban trains replaced so it can be swings and roundabouts.

Why can’t we have more “not for profit” arrangements like Network Rail?

This is a very good question and it may be linked to the “not for profit” phrase connected with Government policy on subsidising unprofitable rail services.

Network Rail’s not for profit status is something of a not very funny joke, since the company is so laden under with debts associated with its creation and the tidying of maintenance backlogs left over from the days of BR that it is incapable of making any profits even if it wanted to.

The maintenance backlogs are now disappearing – West Coast Mainline modernisation helped enormously and the “slash and burn” policy of clearing linesides is beneficial as well – with the result that railway costs are falling naturally as the industry settles into its new form. Massive restructuring to “not for profit” set-ups would inflate costs again through uncertainty and loss of industry knowledge. The restructuring would be particularly severe if you decide to actually take a knife to the real money-eater and eliminate the “interfaces” between different companies in the industry. (If you renationalise you should logically restore the rolling stock to the train operators. Except the engineers with the skills to maintain this stock won’t necessarily come with it and you’ll spend ten years scrapping serviceable stock while you sort out how to cascade second-hand kit from one place to another again.)

Why can’t the Government offset these fare increases?

Mostly because it doesn’t have any money either. In this regard the rail industry and the Government are made for each other, except the rail industry has managed to work out how to let costs sedately fall without fussing or cutting services.

Currently, minus debt interest (mostly generated by Government-inspired panics and reorganisations anyway) the railway is costing the taxpayer £6.80 per train mile as opposed to £11.50 per train mile 30 years ago or £5 per train mile in 1990 (costs drawn from the July 2012 edition of Modern Railways and based on 2011 prices). If we simply extend the rising income line and the falling cost line, take into account that average rail fares per passenger mile actually fell last year and extrapolate we find that the privatised rail network is really heading straight for that glorious utopia where the network is self-funding (barring some interest payments) and everyone’s fares are lower than they are now. Certainly the winner of the West Coast franchise is promising big premiums and huge fare cuts so it must be true.

So where is all this money going?

Well, some will inevitably find its way into the hands of fat-cat shareholders. The fat-cats are very hard to hurt because they will have carefully hedged their shareholdings so that they win if you confiscate their shares. And they’ll sue you.

The remaining shareholders are predominantly employees of the offending companies, including rail staff, using the shares as a savings scheme. When Railtrack went down it wrote off a lot of its employees’ pension schemes in the process. Eliminate this structure and you end up renegotiating pay and pensions.

A fair chunk goes back to the Government, who then have to pay it to Network Rail so Network Rail can pay interest on debts run up while repairing infrastructure left to decay during Government idleness. (Intercity wanted to modernise the West Coast mainline in 1990; the Treasury got the start of the project put back to 2000. It cost the Treasury much more that way through an extra ten years of depreciation on crumbling buildings, ageing track and rolling stock pushed past its prime; whether the 1990 scheme was any better than the 2000 scheme is another matter.)

A goodish chunk goes on all the lawyers and consultants to manage interfaces between companies. Some of this is unnecessary. Some of the outsourcing is simply people choosing to be available to all rather than being employed by one firm, and charging extra for being good enough to be able to work like this. Some of it is just because BR used to send railtours down obscure branch lines when it felt like it and now operators have to get lawyers to draw up indemnity clauses, which wouldn’t necessarily go away because you eliminated the interfaces. (Don’t worry. The cost would invent a justification somehow.)

Quite a lot is spent on materials and maintenance. For some reason this is all very expensive these days, partly because of a “nothing but the best will do” approach which pervades in a bid to persuade the punter that this is better than the days of “what’s the cheapest thing we can get to move” approach of the BR era. People are also getting more picky about the quality of the trains that they get invited to unveil and be photographed in front of. In a bid to illuminate the Metropolitan Elite as to what BR could be like, I am all in favour of the new trains for the Gospel Oak to Barking line in North London (which Transport for London apparently urgently needs despite having had new trains within the last 30 years – they arrived 3 years ago, to be precise) being cascaded Class 144 units from Yorkshire. Pacers have never worked in the London area, which is an odd omission. Unfortunately the Metropolitan Elite would probably refuse to believe that BR could have bought anything so awful, and insist that they must be brand new.

The remainder is a result of privatisation having created a market for rail staff, which drove pay levels up. Rail staff are very level-headed people and telling them that they own their company – which they already do, having bought most of the shares – is unlikely to persuade them all to take an immediate 50% pay cut. Instead, you’re better of murmuring about the “trickle-down” effect of all these train drivers able to live the high life and observe that we don’t seem to have genuine large-scale rail strikes any more.

British Rail train. Basic box with hopper windows, doors hanging on a loop of rubber, simple lighting and a customer information system involving a driver speaking into a microphone. Moves if asked to, though not enthusiastically. Reliable animal and open to extensive refurbishment at relatively low cost.
Privatised railway train. Sleek box with carefully styled front end. Air-conditioned with modern sliding door mechanisms and customer information display systems throughout train augmented by an automated announcer. Moves when computer says it can with sharper acceleration than is necessarily comfortable. Much more expensive, but also attracts a lot more passengers.

Why is this post so anti-Labour?

Mostly because the author is fed up with reading about how wonderful the industry could be if only it could be subjected to another ten years of distracting upheaval. Much of this seems to feature Labour ministers proclaiming that after 13 years in Government they have suddenly decided, now that their record-beating majority has vanished, that they have all the answers. Interestingly they had some rather similar answers before 1997 too…

The author is just old enough to remember the final days of BR and they were either much the same as now or no better. Enough “old railway” knowledge survives in the current structure to ensure that things the BR would like to have done are actually happening.

The current lot are marginally better – they don’t seem to resent so much a structure that they could change but aren’t going to – and we may get to look forward to another last-minute fare cut at the end of this year.

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2 thoughts on “The Annual Explanation of Rail Fare Increases

  1. gawainsmum August 16, 2012 / 08:41

    Very interesting. Except that the campaign for comprehensible English would like to know what “Massive restructuring to “not for profit” set-ups would inflate costs again through uncertainty and loss of industry knowledge.” means. (Did you borrow that one from Roger Ford?

    • thegawain August 16, 2012 / 18:12

      Bother, another silly sentence. Basically, if you shuffle the rail industry again all the experienced people will be pushed out (as in privatisation – trainees are cheaper than experienced people and cutting costs is the point). Those who aren’t pushed are likely to decide (or have their families tell them) that they’re too good to be shunted around for years – and decide to jump to better roles instead.
      When First takes over West Coast it will put in its own management team. Elsewhere in First there will be a round of promotions to fill vacancies thereby created. What of the experienced Virgin team? They may be found jobs in Virgin or they may retire, but they probably won’t be in UK rail any more. The new team have to find their feet. Meanwhile performance will slip.
      Just translate that across the whole industry and imagine the impact of Cross Country trying to find their feet again, particularly if the managers are political appointees given the “easy” role of showing everyone how a railway is really run. (Like the Edinburgh councillors who have spent several years demonstrating how quickly and efficiently imported people can build eight miles of tramway. Or the oil boss who ran Railtrack so successfully.)

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