The Contemporary Structure of Privatised Rail: Doomed to Fail the Taxpayer

7757 words (31 pages) Dissertation

16th Dec 2019 Dissertation Reference this

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British politics experienced a paradigm shift in the late 1970s towards economic neoliberalism (Hay, 2004) – arguably, every elected government since has held neoliberal ideals. Neoliberalism is a broad term (Bockman, 2013), but it is constructed on the premise that market-based reforms lead to greater efficiencies in the long run and enhance economic growth (Shaoul, 1997, p. 480). In Britain, the adoption of a neoliberal ideology by the Thatcher (1979 – 1990) and Major (1990 – 1997) premierships saw an array of state-owned enterprises become privatised. This paper studies the privatisation of British Rail, which remains topical and controversial today. The thesis for this research project suggests privatisation has measurably failed both the taxpayer and consumer but benefited the political elite in terms of power. This study does not argue for renationalisation, nor does this essay seek to endorse further privatisation. Instead, this project highlights why the privatisation occurred despite its measurable failings for the taxpayer and consumer.

The neoliberal privatisation of British Rail saw the structure of its passenger services transform from an integrated state natural monopoly to a disintegrated tripartite structure. The tripartite structure, imposed under the Railways Act (1993) aimed to fully privatise the network by creating three roles; first, infrastructure was to be managed by Railtrack, a stock market listed PLC; second, Train Operating Companies (TOCs) were to bid for time-restricted passenger franchise routes to operate; thirdly, Rolling Stock Leasing Companies (ROSCOs) were to manage rolling stock (carriages and engines), which they leased out to TOCs for passenger services. Meanwhile, British Rail’s freight services were to pass to the private sector in a similar fashion, where FOCs (Freight Operating Companies) managed the movement of goods – these services were mobile and not restricted to franchised routes like TOCs. After safety concerns and poor business performance, Railtrack was placed into administration in October 2001 (Bowman, 2015, p. 55). Almost immediately, Railtrack morphed into the not-for-dividend infrastructure company Network Rail (Whitehouse, 2003). Also, a relatively small number of Open Access Operators (OAOs), subject to agreements from the regulator, use several passenger mainline slots (BBC, 2017) to provide passenger services. Since the birth of Network Rail and the introduction of OAOs the passenger rail industry has remained largely unchanged from its tripartite arrangement further agitating its critics. Equally, there has been minimal reform to freight providers since the initial privatisation.

Privatisation is at the heart of the ‘states versus markets’ debate within International Political Economy (IPE), and it is a common policy for advocates of neoliberalism.

The sub-discipline IPE and its genesis are commonly accredited to Strange (1970). Strange suggests IPE is needed to study the relationship between international economics and international relations. For many typically ‘British’ academics, the discipline has failed to understand the relationship between political authority and market power (Burnham, 1999 & Cammack, 2007). A failure to understand this relationship is a result of what Wade (2009) describes as a dominant quantitative- liberal ‘American’ orthodoxy in IPE. For Cohen (2007 & 2008), who coined the ‘American’ and ‘British’ binary definitions of IPE, the former uses a positivist methodology to study causal relationships and the latter takes an open normative diachronic approach that studies structure and change rather than individuals.

American IPE’s obsession with the individual is a result of its development from neoclassical economics, which focuses on aggregating rational economic agents’ preferences. Cohen’s binary definition of either ‘American’ or ‘British’ IPE has received criticism from numerous authors (Germain, 2009; McNamara, 2009; Phillips, 2009; Ravenhill 2008). Higgot and Watson (2008) even describe Cohen’s classifications of IPE as a caricature that oversimplifies the range of debates within IPE.

This study takes a heterodox approach to IPE that by Cohen’s (2007 & 2008) standards could be considered transatlantic as it uses a mixture of quantitative analysis and a qualitative Marxist-based view of depoliticisation theory as developed by Burnham (1999, 2001, 2011) to critique the privatisation of British Rail.

Additionally, by combining quantitative analysis with a critical ‘British’ methodology this piece of work somewhat undermines Cohen’s caricatured binary of IPE as a discipline. Accordingly, this paper will use a mix of primary and secondary sources. A variety of primary sources will be identified and used – mainly in chapters one and two – these sources include speeches made by transport officials, data collected by rail regulators and statistics agencies (such as the ORR, ONS and Eurostat), legislation and government White Papers. Also, this paper uses secondary sources to permit an in-depth insight into the rail industry – something that would be challenging with the time and resources available for this paper if it only relied on

primary sources. Secondary sources used are in the form of journal articles, public interest reports and contemporary newspaper reports.

After assessing the existing (both critical and supportive) analysis made by the secondary literature surrounding the privatisation of British Rail, this dissertation explores three main themes; first, the negative effects of privatisation for the taxpayer; second, the failings of privatisation for the consumer; third, the benefits received by the political elite in terms of power despite shortcomings for the taxpayer and consumer. Each theme corresponds to a single chapter.

Chapter one explores the main failings that the privatisation of British Rail has brought upon the taxpayer. To identify failings for the taxpayer, the chapter first explains why public subsidies are needed and how they flow through the industry. After that, the chapter shows that direct subsidies for TOCs have reduced, whilst direct subsidies for Network Rail have increased – to the extent where total net government support for the industry has risen. Finally, the chapter identifies how indirect subsidy flows from the taxpayer through the rail network to private hands.

The penultimate chapter explores how the privatisation of the rail industry failed the consumer. The chapter shows how the introduction of the private sector has led to rail services diverging from customers’ wants in terms of price. The chapter then shows how price increases in fares have not been shared equally among passengers – leading to some being harmed more than others. After that, the chapter shows how improvements in terms of safety standards are due to advances in technology rather than privatisation. Then the chapter illustrates how the customer faces a lower quality ticket purchasing experience as they incur a higher opportunity cost to purchase tickets now compared to pre-privatisation. Additionally, the chapter explains how increases in both franchised passenger journeys and freight net tonne- kilometres is not a product of privatisation.

The final chapter explores why British Rail was privatised and why it has not seen significant reform, despite its failings for the taxpayer and consumer. This last chapter suggests the political elite receive benefits from the privatisation. The chapter finds through depoliticised management of the rail network, central

government can legitimise themselves whilst retaining arm’s length control of the industry. Hence, a major structural reform of the industry has yet to happen

Most academics and research reports suggest the privatisation of British Rail was a failure for the consumer and the taxpayer, but mainly focus on the taxpayer’s perspective; in the minority, some neoliberal authors suggest the privatisation of British Rail has benefited the consumer and the taxpayer. Strangely, there are some authors that argue further privatisation is needed to prevent the current failings for the taxpayer and consumer. There are several throwaway comments in leading British newspapers supporting or at least not criticising the now privatised rail network, but these lack sound empirical evidence or rely on falsely analysed trends in passenger numbers. Commentary on the political elite in terms of rail seems to be relatively sparse in relation to work that challenges the privatisation of British Rail on the grounds of the consumer and taxpayer. However, there has been some contemporary academic work that challenges business elites using Mills’ (1956) view of the power elite.

Crompton and Jupe (2007) examines the failings of Railtrack within the privatised rail system between 1996 and 2001. The article then turns its focus to Network Rail the not-for-dividend replacement for Railtrack and analyses the challenges it faces. Crompton and Jupe’s analysis is critical of Network Rail as an alternative to renationalisation as they believe Network rail only ameliorates the symptoms of Railtrack’s issues, but does not solve fundamental underlying problems.

Furthermore, Crompton and Jupe identify that, in rejecting public ownership, Network Rail ensured Blairite supporters were not offended, and it artificially kept debts off the public balance sheet. Crompton and Jupe’s findings are difficult to critique as they identify issues facing Network Rail methodically and provide examples of similar firms for comparison.

Separately, Jupe analyses how “rail privatisation led to a large increase in both costs and subsidy” (Jupe, 2010, p. 347) compared to the state-run British Rail. Jupe (2010) notes the rail franchising model was supposed to reduce TOCs’ reliance on subsidies; however, revenue from ticket sales was not enough to cover the rising costs TOCs faced compared to the state-owned natural monopoly British Rail. Jupe further identifies in a National Audit Office (NAO, 2008) report that there have been substantial increases in unregulated ticket fares to reduce TOCs’ reliance on subsidies. Jupe’s (2010) analysis relies on an abundance of evidence to support his

arguments over rising costs, subsidies and unprotected ticket prices. Unfortunately, Jupe (2010) does not expand on the political causes and consequences of the ticket price increases for unprotected tickets – chapter three will address this.

Building on Crompton and Jupe’s (2007) analysis, Bowman (2015), writing in the Accounting Forum, focuses his research on fictitious claims that train operators produce a net gain for British taxpayers. Bowman scrutinises the Network Rail subsidy regime, which enables train operators to achieve profitability misleadingly without increased direct state support. The illusive profitability deceives the public and contributes to “the appearance of success delivered by private enterprise” (Bowman, 2015, p. 53). Finally, Bowman suggests rail in the UK operates under a false pretext that it is privatised, due to high levels of hidden public subsidy.

Bowman’s (2015) argument holds weight as a criticism of politicians who use misleading data to suggest UK rail is a successful private enterprise; however, Bowman’s final comments about the extent to which UK rail is privatised are somewhat overshadowed by the private firms that make up the industry, such as TOCs – despite them being in receipt of indirect public support.

McCartney and Stittle (2013) successfully produce a critical overview of Rolling Stock Operating Companies (ROSCOs) and how they extract large profits from the industry due to their market power and political support. In their journal article, McCartney and Stittle identify ROSCOs have market power because 96% of the passenger rolling stock is owned by three ROSCOs. Moreover, ROSCOs market power is solidified by; one, high barriers to entry in the market (as purchasing trains has substantial fixed costs); two, lack of a functioning second-hand rolling stock market within Europe, due to a lack of interoperability caused by physical and technical differences in network infrastructure. When private firms have high degrees of market power, they have an ability to extract abnormal profits (revenue exceeding costs) due to a lack of political support. The greatest risk to ROSCOs is the potential of a TOC defaulting and failing to pay for leasing rolling stock. However, McCartney and Stittle argue central government intervenes to prevent TOCs from defaulting, as this would

undermine the privatised network. The political elite ‘intervene’ to prevent TOCs from failing by providing generous subsidies.

Bowman et al. (2013a) produce an extremely detailed public interest report condemning the British Rail privatisation as ‘The Great Train Robbery’ (TGTR). The TGTR report provides a systematic and easy to follow assault against rail privatisation in the UK. The lengthy report draws upon the arguments previously used by existing literature; however, Bowman et al. provide significant amounts of data to reinforce their position against rail privatisation. Overall, Bowman et al. presents a coherent case against rail privatisation by using arguments relating to the false assumptions that privatisation was going to provide a better, cheaper service for rail users whilst requiring reduced subsidy levels from taxpayers; also, Bowman et al. inspects lacking investment in rolling stock, profits for TOCs while downside risks are passed to the state, minimal reforms for ROSCOs committing value extraction and entrenched private interests.

Wellings (2014) offers an alternative perspective on the privatisation of British Rail. For Wellings, the sector has suffered from heavy government regulation which has impeded the evolution of the network according to market processes. Further, Wellings links heavy regulation to failures for the taxpayer and consumer post- privatisation. By failings, Wellings observes taxpayers suffer from rising subsidies and consumers from rising fare prices. Wellings’ analysis is relatively unusual because it concludes that increasing private ownership and vertical integration could combat the loss in the previous benefits from economies of scale (generated by the natural monopoly of British Rail) and minimise transaction costs. Wellings’ reasoning can be critiqued as it assumes the public debt owed by Network Rail should be written off in a bid to reduce subsidy levels to zero. Controversially, writing off Network Rail’s public debt and allowing it to sell its assets to TOCs and other private investors would further increase the rate of public finances leaking into private hands – as the debt would not be recovered. While this dissertation does not support Wellings’ (2014) conclusions about privatisation, it is interested in the ‘heavy’ regulation he discusses. More specifically, this research project will review rail regulation as a form of ‘back-door control’ for the political elite in chapter three.

Operating in the minority, Pollitt and Smith (2002) advocated the privatisation of British Rail, claiming the consumer benefited via lower prices and the taxpayer through privatisation proceeds. Pollitt and Smith produce a social cost–benefit analysis (SCBA), developed by Jones, Tandon and Vogelsang (1990) to form their study. Pollitt and Smith’s neoliberal economic argument fails to analyse the spiralling operational costs borne by Railtrack after the Hatfield disaster in 2000, due to poor track management by the privatised firm. Therefore, as Pollitt and Smith’s analysis ignores information around Hatfield, the disaster reduces the credibility of their thesis. Furthermore, their analysis is based on pre-millennial data, which is not representative of the long-term effects on the taxpayer and consumer in comparison to more recent works from Bowman (2015) and Compton and Jupe (2007 & 2010). Moreover, Pollitt and Smith’s (2002) thesis relies on assumptions made to ensure ‘comparability’ between pre-privatisation and post-privatisation – despite explaining these assumptions throughout the paper their reliance on inductive reasoning further weakens their argument.

Writing for the Financial Times, Kay (2015) supports privatised rail, but notes it is not popular. While Kay correctly identifies the public’s broad support for renationalisation, his reasoning for supporting the achievements of privatised rail are based on weak foundations. Kay recognises rail passenger numbers have increased substantially since privatisation – reversing a trend seen pre-privatisation. Kay uses the increased passenger numbers since privatisation to argue its success for the consumer. Other newspaper writers, such as Birrell (2013) and Calder (2016), have a similar vantage point for supporting privatised rail. Kay’s analysis is misinformed because it simultaneously uses rising passenger numbers to support the success of privatised rail, while admitting minimal understanding in what has caused the shift in public preference towards rail (Kay, 2015). Kay’s admission that ‘we’ cannot explain the increase in rail passenger numbers implies he believes there is no causal relationship between rising passenger number and the privatisation of British Rail – this self-admission significantly undermines Kay’s original argument.

Alternatively, this dissertation argues in chapter two that rising rail passenger numbers are linked to two socio-economic trend; first, increased population growth; second, reduced competition from road transport.

With the use of Mills’ (1956) view of the power elite, Bowman et al. (2013b) suggest a small group of elites remain in power due to undisclosed issues, which undermines democratic accountability and allows for complex capitalist societies to be hijacked or frustrated by the small group. While the article is more focused on exposing a small group of elites and their discourse in general, there is some direct analysis on UK railways in the 2010s. Bowman et al. (2013b) posit that the Department for Transport (DfT) is scapegoated while TOCs are strengthened – they argue this protects private interests. Bowman et al. (2013b) and their argument relies on trends identified by Bowman et al. (2013a) and failings associated with the DfT. The failings that have been associated with the DfT revolve around its U-turn to change the TOC provider for the West Coast Main Line. Their argument holds weight, but would benefit from analysing the negative effects resulting from privatisation on the consumer while using Burnham’s (1999, 2001, 2011) depoliticisation theory to understand the motivation of the political elite – this dissertation will address these gaps in chapters two and three, covering the consumer and political elite, retrospectively.

The following chapter confronts the aims of privatisation as set out by the conservative government with reality. Moreover, the structure of financial arrangements within the rail industry are more complicated than they first appear and require further inspection. After further inspection into the financial arrangements of the industry, chapter one illuminates the elusive reality of rail privatisation in the UK as a substantial failure for the taxpayer.

Chapter One

 

The contemporary structure of privatised rail: doomed to fail the taxpayer

A concise government White Paper produced in 1992 set out key promises for the radical neoliberal privatisation of British Rail (Secretary of State for Transport, 1992). The privatisation was to end the state monopoly on rail by opening the industry to the private sector. The introduction of the private sector, in typical neoliberal fashion, was touted to increase competition bringing increased operating efficiency and lower costs without sacrificing quality or safety (Secretary of State for Transport, 1992; Shaoul, 1997, p. 480; Bowman 2015, p. 53). Additionally, the White Paper promised an eventual total transfer of costs and financial risks to the private sector. This chapter argues, from the perspective of the taxpayer that the reality of privatisation starkly contrasts with the Government’s initial proposal and is ultimately a failure.

More specifically, this chapter asserts the current private structure of passenger, and to some extent freight services, are fundamentally flawed and cannot meet the promises outlined in the 1992 White Paper without structural change. “Rail is a loss- making and subsidy-dependant capital-intensive industry” (Jupe, 2010, p. 353) and therefore would fail to operate without any state support. Moreover, rail passenger services and indeed freight services produce positive economic and social externalities (Bowman, 2015), such as easing road congestion and reducing carbon emissions for people and goods per mile travelled (Profillidis et al., 2016). The British state faces a challenge: how can it ensure positive externalities are maximised in this capital-intensive industry, where revenues generated from FOCs and passenger fares do not fully cover the cost of exploiting these externalities? This chapter argues the central government has attempted to solve this funding problem through various direct and indirect subsidy regimes in addition to debt underwriting that has progressively risen since the privatisation of British Rail. Furthermore, by supporting permanently rising subsidies and underwriting debt, the original promise of transferring costs and financial risk to the private sector (see Secretary of State for Transport & 1992 House of Commons Transport Committee, 2017) cannot be achieved and therefore offers a disservice to the taxpayer.

For this chapter to achieve the aims set out above it will inspect three areas; first, how each element of the privatised network generates revenue within its current structure and accordingly why and where subsidies are applied; secondly, the extent

to which direct rail subsidies have risen since privatisation; thirdly, indirect and obscure subsidies coupled with debt underwriting that allows TOCs and ROSCOs to be artificially profitable and how ROSCOs impact public finance.

How is revenue created and distributed through the rail network? Why are subsidies required and where are they applied?

 

Moving from an integrated state monopoly under British Rail to a disintegrated and largely private structure produced private interests of profit maximisation (Whitehouse, 2003) and complex financial arrangements within the rail industry.

Each function of the privatised network was designed to (eventually) be independent of the state and raise funds through private investors or the revenues accrued from the provision of passenger and freight services (Crompton & Jupe, 2007, p. 909).

Ultimately, in the long run, the entire private network was intended to run without state financial support due to market lead efficiencies that reduce costs – this starkly contrasts with reality and will be analysed later in this chapter. This subchapter will analyse where revenue enters the rail network and how it is dispersed among the various rail functions.

Revenue is generated by the rail network from passenger and freight services. First, TOCs generate revenue from running franchised passenger routes and collecting fares from passengers – OAOs generate a comparatively small level of revenue by competing in mainline slots – from 2015-2016, OAOs revenue was approximately 0.8% of TOC’s revenue (ORR, 2016d, Table 12.9). Secondly, Passenger Transport Executives (PTEs), such as Transport for London, manage local passenger routes and collect fares. Thirdly, FOCs generate revenue from private businesses by transporting raw materials and more recently have begun to increase their share in transporting consumer goods by competing with road haulage (The Economist, 2013). The rest of the rail industry is made up of Network Rail, ROSCOs and subcontractors which all tap into the revenue generated by TOCs, OAOs and FOCs. Specifically, TOCs, OAOs and FOCs pay track access charges (TACs) to Network Rail, which in return provides track infrastructure, train planning and signalling (Wellings, 2014, p. 258). ROSCOs lease rolling stock to TOCs, OAOs and FOCs, generating an income (McCartney &

Stittle, 2013). Subcontractors are hired by Network Rail and ROSCOs to assist with track maintenance and rolling stock maintenance, retrospectively. In total, the modern structure of the industry involves approximately 100 companies and generates higher transaction costs and loses the benefits associated with economies of scale compared to pre-privatisation (Wellings, 2014, p. 257).

Sitting between government and private (or arguably semi-private in the case of Network Rail) rail firms, regulators play a part in the structure of the network. Unlike the rest of the rail industry, which has seen minimal change since privatisation, regulators have changed over time. Initially, after privatisation, the Office of Passenger Rail Franchising (OPRAF) managed the selling of franchised passenger routes to TOCs (Wellings, 2014, p. 258). The responsibility for managing the competitive tendering process for selling franchises to TOCs was replaced by the Strategic Rail Authority (SRA) and then the DfT. Since privatisation, the Office of Rail Regulation regulated Railtrack and then Network Rail. The same department still regulates Network Rail to ensure it complies with health and safety law, regulates access to the network, licences the operators of railway assets, regulates competition and enforces consumer protection law, but has changed its name to the Office of Rail and Road (ORR).

While introducing this chapter, this paper noted rail is fundamentally a loss-making industry (Jupe, 2010, p. 353). Shaoul (2006) asserts rail is inherently loss-making as it is a highly capital-intensive industry. Moreover, the cost of enhancing the rolling stock and infrastructure from rail fares is extremely challenging, if not impossible (Shaoul 2006, p. 151) – for Shaoul this issue applies globally and does not just face the UK. McNulty (2011, p. 5) identifies an efficiency gap of 40% against four European comparators using unit costs per passenger kilometre – this is a major factor in driving the industry’s need for subsidies. Furthermore, not only is the industry inherently loss-making and capital-intensive with relatively low revenues compared to costs, it produces several positive externalities for society (Dft, 2016).

Unexploited positive externalities are a cause of market failure and demand correction to achieve efficient societal benefits (Shaoul, 2006 & Lee et al., 2013). Thus, government intervention in the form of subsidies have been required (in ever growing value) since privatisation (Taylor & Slomann, 2012).

Direct government subsidies enter the contemporary rail industry at four main points. First, subsidies in the form of grants are paid to TOCs and FOCs for running unpopular services that exhibit positive externalities. Secondly, rail support grants are paid to Network Rail. Thirdly, PTEs receive government grants to assist in running local passenger services. Finally, the government supports some major projects (High Speed 2 and Crossrail) and arm’s length bodies including British Transport Police and Transport Focus, a grant to British Rail to finance its residual activities, and other ad hoc rail projects (ORR, 2014, p. 6 & ORR, 2016f).

To what extent have direct subsidies increased since privatising British Rail?

 

For this chapter, a distinction must be made between the terms direct and indirect subsidies. Direct subsidies, the focus of this subchapter, are officially recorded subsidies from the government to recipient organisations and private firms that facilitate the function of the rail industry. Indirect subsidies, the topic of the next subchapter, are less transparent and require some analysis to interpret. Moreover, indirect subsidies, in the context of this study are direct subsidies to a specific rail function that indirectly supports other rail activities.

Using the latest ORR government support to the rail industry dataset and adjusting prices for inflation, this study has produced Figure 1.1, 1.2 and 1.3. Figure 1.1 displays total government assistance for the rail industry as a sum of: net payments to TOCs, PTE grants, grants to Network Rail and (mainly) major project spending. The orange section displays the rail industry pre-privatisation and the black line for post-privatisation (from the first full year after the Railways Act of 1993). It is evident from Figure 1.1 that total government support has risen significantly in real terms post-privatisation, from £2562 million in 1994-1995 to £4771 million in 2015- 2016. The increase in government support for the rail network, though variable, shows a linear upward trend in real terms over the data period – this linear trend is show by the grey dotted line in Figure 1.1. By manipulating the (ORR, 2016f) data in Table 1.6, it can be observed that the average year-on-year increase in total real

government support since the first full year of privatisation has been £105.2 million. Therefore, the sustained rise in government support post-privatisation has been a significant drain on the taxpayer. Moreover, for the taxpayer, privatisation has had the opposite effect to that that was promised in the 1992 government White Paper (Secretary of State for Transport, 1992). Naturally, questions must be asked as to why privatisation in its current form has been supported by successive governments – chapter three will address why the political elite support such a poor policy for the taxpayer.

Figure 1.1

TotalGovernmentSupport(£Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: ORR (2016, Table 1.6)

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Figure 1.2, as shown by the downward sloping dotted grey linear trend line, has been produced to illustrate the gradual sustained decrease in government payments to TOCs since privatisation. From 1994-1955 government payments to TOCs totalled

£2740 million. From 2011-2012 onwards, TOCs have in total produced a positive balance for the taxpayer, due to falling government support while TOCs pay for franchise rights. The period from 2011-2012 onwards is coloured blue to represent the surplus for government and the taxpayer. From 2015-2016, net government

support for TOCs was £-817 million and represented a significant surplus for the taxpayer. The average year-on-year decrease in real government support for TOCs since the first full year of privatisation has been £169.4 million. In isolation, these results look promising for the taxpayer as their support for TOCs has progressively lowered in parallel to the government’s initial plans for it in the 1992 White Paper. However, despite the reasonable success in terms of lowering subsidies for TOCs, the overall level of government support in real terms has risen significantly since privatisation. Hence, government spending must have increased at a faster rate elsewhere to contribute to an overall increase in support levels for the rail industry. The next paragraph explores rising government grants to Network Rail and supports this verdict.

Figure 1.2

NetGovernmentPaymantsto/fromTOCs (£Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: ORR (2016, Table 1.6)

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Figure 1.3 inspects the single biggest component of government spending for rail. According to the dataset in Table 1.6 presented by the (ORR, 2016f), from 2015-2016 government grants to Network Rail accounted for 83.8% of total government support that year. Since the inception of Network Rail, government grants have risen more than four times over from £902 million in 2001-2002 to £3,999 million in 2015-16.

The fastest period of growth in government grants for Network Rail was between 2001-2002 and 2006-2007, where grants increased 474.7% in real terms. Since 2007-2008, grants for Network Rail have plateaued and seen gradual change each year. However, as stated, the overall trend in grants for Network Rail has been upward – increasing enormously in real terms over 14 years at a year-on-year average of £221.2 million.

Figure 1.3

GovernmentGrantsto NetworkRail (£ Millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: ORR (2016, Table 1.6)

The freight industry presents some notable successes since privatisation. Total volumes transported have increased by 80% from 13.5 billion net tonne-km in 1995 to 24.4 billion in 2013-2014, despite train numbers falling by 30% since 2003 (Rail Delivery Group, 2015, p. 3). From 1998 to 2008 the number of staff per train million kilometres fell from 100 to 65 (The Economist, 2013). The increase in goods moved, reduced train numbers and reduced staff per mile kilometre represents an increase in efficiency offered by FOCs. FOCs success is a result of highly-competitive logistics and competition amongst FOCs and road haulage providers (McNulty, 2011, p. 21). Perhaps most significantly, rail freight does not receive operating subsidies (The

Economist & McNulty, 2011, p. 21), unlike TOCs. To some extent, FOCs independence from state subsidies represents a success for the taxpayer post- privatisation. However, FOCs have benefited from indirect subsidies. FOCs receive indirect subsidies via Network Rail through lower TACs. Therefore, the extent to which privatised rail has benefited the taxpayer is limited as it uses indirect state subsidies – this resembles the analysis provided in the next subchapter about indirect subsidies for TOCs.

In concluding this subchapter, one clear message must be taken away: total direct government support since the privatisation of British Rail has risen substantially. Rises in government support to the privatised rail network are a failure for the taxpayer. Moreover, the rail industry’s increased dependence on government support opposes the promises set out in the 1992 White Paper (Secretary of State for Transport, 1992). Despite the sustained lowering in direct support for TOCs and no direct support for FOCs, total government support has risen significantly.

Additionally, advocates of privatisation in its current form might point to lowering direct subsidies for TOCs as a source of success for the taxpayer; however, this argument will be undermined in the next subchapter when reviewing the impact of rising indirect subsidies on TOCs. The largest dependant on government support has been Network Rail since 2002-2003 – this organisation’s dependence on the taxpayer was a major factor in causing total government support for the rail industry to rise post-privatisation.

How has a rise in subsidies and debt underwriting for infrastructure indirectly reduced TOCs’ direct financial dependence on the state? How do ROSCOs affect the taxpayer?

 

The last subchapter identified a sustained decrease in public subsidies for TOCs while subsidies for the infrastructure provider Network Rail increased post- privatisation. This subchapter shows how rises in subsidies for Network Rail have permitted TOCs to be artificially profitable and less reliant on state support – to the extent where TOCs produce an artificial net gain for the taxpayer. Furthermore, the subchapter suggests government underwriting of debt for Network Rail has enhanced TOCs artificial profitability. Additionally, this subchapter argues ROSCOs increase the rail networks reliance on public support. Note, this section does not attempt to explain why these financial arrangements have been supported by the political elite, that topic is discussed in chapter three. Also, rising passenger numbers coupled with higher fares have contributed to TOCs rising profitability – rising fares in real terms will be analysed in chapter two.

Jupe (2010) correctly noted using the data available to him that TOCs achieved artificial profitability by consuming high levels of direct support. Jupe notes, between 1997-98 and 2002-03 the TOCs collectively would have had an annual loss of over £1 billion without subsidy (Jupe, 2010, p. 349). Since Jupe’s journal article, a downward trend and eventual reversal in direct support for TOCs (illustrated by Figure 1.2) has been observed. While direct subsidies have lowered for TOCs since privatisation, TOCs have maintained sufficient profitability to continue operating.

Superficially, a reduction in direct state support challenges Jupe’s (2010) analysis of direct subsidies as a mechanism to maintain TOCs’ artificial profitability. The reduction in direct subsidies for TOCs allows for a discourse that supports private interests in the rail industry. Moreover, Sir Richard Branson claims profitability and the resulting dividend payouts for Virgin trains (a TOC) were a result of “the hard work” (Branson, 2013) of his staff rather than direct subsidies. Branson (2013) acknowledges Network Rail “has cut the overall track access charges from £3bn to around £1.5bn a year”, but passes it off as something “set by the government”.

Branson omits that Network Rail receives enormous subsidies from the state as a source to lower TACs for TOCs.

Bowman (2015) identifies that TOCs have become reliant on rising indirect state subsidies rather than the direct subsidies that Jupe (2010) previously identified. Bowman’s logic assumes direct subsidies for Network Rail result in lower TACs for TOCs and hence indirectly subsidises TOCs. Bowman shows how during the first decade of Network Rail’s existence passenger fare revenues increased by 48% and passenger kilometres increased by 43%; meanwhile, TACs declined by 12% in real terms. Rising government grants (Figure 1.3) given to Network Rail have allowed the organisation to lower its income from TACs. Moreover, the levels of indirect government support are greater than they appear for TOCs as the state underwrites the debt issued by Network Rail. Furthermore, the government guarantees to underwrite debt issued by Network Rail have allowed the organisation to essentially borrow at a risk-free rate (Bowman, 2015). Also, from 2014-2015 onwards, the government has been lending directly to Network Rail (ORR, Table 1.6, 2016). In practice, Network Rail is nearly 80% debt financed, which compares highly to its predecessor Railtrack, which was never less than 50% equity financed (Bowman, 2015). A perverse linking of public subsidies and private dividends remains; however, the link between subsidies and TOCs has been obscured and is delivered indirectly through Network Rail – nevertheless, this leakage of public money into private hands is a failure for the taxpayer.

This paragraph and the next inspect how ROSCOs within the wider structure of the privatised network have caused public support for the railways to increase. Aside from McCartney and Stittle’s (2012) journal article, ROSCOs have often been ignored by the critical academic literature while TOCs and Network Rail have been a focal point. Uniquely, ROSCOs have benefited from minimal regulation compared to other divisions of the industry (McCartney and Stittles, 2012). Also, ROSCOs exhibit market power and distort the competitive process (ORR, 2006b) in leasing rolling stock due to high barriers to entry. High barriers exist within the rolling stock industry primarily for two reasons; first, TOCs do not wish to purchase rolling stock as franchises are operated for short set periods of time; second, second hand rolling stock cannot be purchased from Europe due to lack of interoperability (McCartney & Stittle, 2012, p. 159).

Not only can ROSCOs distort the market price for rolling stock required by TOCs and FOCs, ROSCOs also gain a relatively risk-free income because of indirect government support. Moreover, ROSCOs can operate with significantly reduced risks if the government wishes to maintain the current structure of rail. If the political elite want to maintain the status quo, they must prevent TOCs defaulting as that would undermine the success of privatisation (McCartney and Stittles, 2012, p. 165).

ROSCOs remain significant as they in effect charge TOCs above the market price for rolling stock, while TOCs are indirectly subsided via reduced TACs charged by Network Rail due to increased direct government support for Network Rail. The extent to which the taxpayer is hurt by ROSCOs’ high charges depends on the government’s sustained support for maintaining the status quo.

To summarise: this chapter has shown that contrary to the government’s promises, the neoliberal privatisation of British Rail has failed to reduce rail’s dependence on the state and as a result the taxpayer has suffered. The contemporary structure of privatised rail is loss-making and inherently reliant on the state to cover its capital- intensive costs – moreover, rail produces positive externalities for society and hence requires higher levels of support. Not only has state support for the rail industry not reduced, it has increased significantly in real terms. Moreover, due to the complex financial relationships between private elements of the rail network, it is difficult on the surface to analyse how state support enters the industry and how it indirectly supports other elements of the network, such as TOCs, FOCs and ROSCOs. Hence, TOCs and ROSCOs have been able to perversely link indirect subsidies to artificial profits allowing them to distribute dividends among shareholders. The distribution of taxpayer’s money in this way is most certainly a failing. The next chapter analyses the (largely negative) effects of the privatisation on the consumer.

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