House of Commons - Transport

Select Committee on Transport Sixth Report

2 Rail fares in the bigger picture

The strategic significance of the railways

6. The railways are a key element of our national infrastructure, and the use and management of the railways impacts significantly on a wide range of public policies such as regional development, long-term economic growth and environmental policy.[3] It is also a sector where structural constraints limit competition. Rail travel cannot, therefore, be considered only as a consumer product which is subject to the principles of competitive supply and demand. The structure and levels of fares determine how the railways are used, and by whom, and this in turn is of crucial strategic importance to overall transport policy and regional development.

7. In addition to its importance to key policies, the railways are expected to receive public subsidies to the tune of £3.7 billion in the financial year 2005/06[4], and it is surely therefore justified to expect that railways assist in achieving the Government's broad strategic policy objectives for the environment, regional development as well as transport. The level of public subsidies entitles us to demand that the railways are run as a public service rather than as a private commodity.

THE SIGNIFICANCE OF RAIL FARES FOR THE WIDER ECONOMY

8. The price and reliability of rail travel is likely to affect the long and medium-term choices of individuals about where they live and work, and of companies about where they locate their businesses. Cumulatively, such decisions are likely to affect regional development and property prices, and so there is a macro-economic dimension to the pricing of an important transport mode such as rail travel. In the short term, many passengers, particularly commuters and business travellers, may have little choice but to use the railways, almost regardless of affordability. This may at least in part account for the increase in the numbers of passengers in recent years. However, in the longer term, unaffordable fares could lead passengers to opt for other transport modes or relocation.[5]

9. If rail were an open competitive market, easily accessible to new entrants providing competition on individual routes, the potential strategic impact of price levels would have been less important. In that scenario, if prices were too high, new companies would be tempted on to the line and undercut the inflated price. This is what tends to happen in the coach and airline industries. But in the rail industry, most routes are operated as virtual monopolies. As a result, prices can be held in check only by regulatory intervention.

10. The affordability and attractiveness of rail travel is likely to affect the ability of Government to achieve broader economic and regional development goals. It is therefore imperative that the railways are managed and priced in such a way that they help and facilitate economic and regional development. Given that the railways are now run as private semi-monopoly enterprises, the Government needs to regulate actively to ensure that fares policy works with the grain of broader Government policy and not against it.

THE ENVIRONMENTAL SIGNIFICANCE OF THE RAILWAYS

11. The Government has set targets for the reduction of air pollution, CO₂emissions and road congestion. The 2004 White Paper on the Future for Transport acknowledged that transport produces about a quarter of UK CO₂ and that "some 80 per cent of transport CO₂ emissions come from road vehicles."[6] The White Paper reiterated the Government's commitment to cutting overall CO₂emissions by 60 per cent by 2050.[7]

12. The RMT pointed out that a modal shift towards the railways would be essential to achieving such environmental goals,[8] and the Parliamentary Under-Secretary of State for Transport, Derek Twigg MP, told the Committee that the Government is indeed committed to a modal shift and growth on the railways.[9] Such a modal shift will depend both on there being sufficient capacity on the railways, and on the pricing and general attractiveness to passengers of rail travel.

13. If the Government is to entertain any hope of achieving its targets on emissions and congestion, it is essential for it to encourage a significant shift from road to rail. Rail travel must be made affordable and user-friendly in order to encourage people to reject cars in favour of rail. Ticketing policy is crucial in achieving this public policy goal.

PUBLIC SUBSIDY CREATES A PUBLIC SERVICE OBLIGATION

14. Public expenditure on the railways is currently £3.7 billion per year, and is projected to rise steeply to £4.9 billion in 2006-07.[10] Public subsidy, especially of this magnitude, entitles the public to expect that the railways are run as a public service. The railways are a public service in receipt of substantial Government subsidies. In the spirit of a public service, the railways should be affordable and accessible to all, for walk-on, same-day or advance purchase travel. To achieve this, the Government needs to police the train operators much more rigorously than it has done to date.

The level of public subsidies for the railways

15. Evidence to our inquiry questioned whether the level of Government subsidy to the railways is appropriate, and what consequences this in itself might have for rail fares. The Railway Consultancy put the level of subsidy as well as the public service function of the railways in context:

"Although British Government support to the railways ballooned a couple of years ago, […] it has historically been at a much lower level [than in other European countries]. That is a political decision, taken in a country which has generally adopted the view that users (rather than taxpayers) should pay for public services. That logic is questionable if (as with the railways) those services indirectly benefit the entire community, and where the railways have been prevented from taking advantage of indirect benefits (e.g. British Rail was forced to divest itself of property-related income)."[

16. The Government however, considers that controlling the level of the public subsidy for the railways is crucial,[12] and indicates no intention of bringing rail subsidies more closely into line with those found in many neighbouring European countries.[13] Neither do we have any indication that exorbitant rises in ticket prices might pressure the Government to step in to increase subsidy.[14] The Minister argued that the current price of rail fares is not dissuading passengers from using the railways, and he maintained that the "only way of doing something about the fares is to put more Government subsidy in."[15]

17. We accept that an increase in subsidies is not in itself the solution to the problem of unreasonable rail fares. We appreciate that the railways have to compete with many other vital services such as schools and hospitals for Government funds and we do not argue for French levels of railway subsidy. We do, however, believe that the dogged pursuit of a policy to minimise public subsidy risks the long-term viability of rail services and undermines the proper public service function of the railways. We need a balanced approach to rail subsidy which allows investment where relatively small sums can produce significant results. This should be accompanied by strong controls ensuring that the Government gets good value for its money. There must be no waste.

Objectives of ticketing policy

18. Two train operating companies in the long distance market, GNER and Virgin Trains, indicated clearly to the Committee that their main objective when running trains is to maximise revenue.[16] Operating on long-distance routes, their primary competition comes from coach companies on the one hand, and the airlines on the other. At the lower end of the fares range, prices are set so as to compete with the coach market, whilst at the higher end of the spectrum the aim is to compete with airlines.[17] Both of these types of competitors are private and free of price regulation. Virgin Trains explained how the nature and level of competition on individual routes informs a ruthless calculation of revenue maximisation for open fares:

19. The relative price of long-distance rail travel varies with the nature and level of competition from other modes on the route in question. In markets for commodities that do not receive massive subsidies from the tax-payer, for example cars, this is appropriate, but in a sector which does receive such subsidies it is not. Passengers who travel on routes such as London-Manchester where operators perceive that they can increase fares, are also tax-payers, and they will expect to see a fair system of fares which provides value for money in just the same way as passengers / tax-payers travelling on the Glasgow-London route.

20. Passengers who use routes where there is little or no competition from coaches or airlines, or who are obliged to travel in peak hours or at short notice are out of pocket. If the primary objective of ticketing policy is to maximise revenue, the railways fails in its objective of functioning as a public service benefiting all tax payers who contribute to the massive public subsidy.

21. We strongly urge that the Government revise its policy on unregulated rail fares. The primary objective when setting rail fares and fare restrictions must always be to maximise the public benefit of the railways. This entails the greatest possible number of passengers travelling at the cheapest possible prices without raising public subsidies to unrealistic levels. This is not synonymous with the maximisation of revenue or profit for private operators. Given the natural preoccupation of private operators with maximising revenue, it is the Government alone which is able to safeguard a public service railway operated to maximise the benefit to passengers and taxpayers.

Fares and the efficiency of train operators

22. The Railway Consultancy pointed out that it is not only Government subsidy which determines the level of rail fares. The other crucial factor is the efficiency of operators.[19] Passenger Focus emphasised that public subsidies in no way reduces the need for industry efficiency:

23. It is clearly not within the scope of this short inquiry to evaluate the actual efficiency of the operation of the railways. The Committee intends to revisit the railways with a root and branch inquiry later in 2006, and we expect that inquiry to consider the efficiency of the industry. We believe the issue of industry efficiency is crucial to controlling the levels of fares. We also consider that too little attention is being paid to driving up efficiency levels and controlling costs as a way of keeping ticket prices down. Subsidies and industry efficiency are both crucial elements in ensuring that the railways provide value for money to travellers.

Railway capacity and fares policy

24. Limited capacity and bottlenecks on the rail network are a well recognized problem, and the Government has recently announced that a White Paper in 2007 will address this long-term issue.[21] Clearly, capacity problems are a barrier to continued growth in rail travel, on a par with prohibitive pricing and impenetrable fares structures. Furthermore, as explained by Transport 2000, "fares policy is often driven by the lack of capacity."[22]

25. The Parliamentary Under-Secretary of State for Transport, Derek Twigg MP, acknowledged that there are considerable challenges involved in increasing rail capacity to facilitate significant further growth on the railways.[23] Indeed, the fact that the Government has apparently (but quietly)[24] phased out its specific Public Service Agreement (PSA) target to increase rail passenger kilometers by 50% between 2000 and 2010[25] may be related to the fact that in the four years between 2000-01 and 2004-05, overall growth in passenger kilometres was less than 11%.[26] This rate of growth was hardly going to be adequate in achieving the original and ambitious PSA target

26. The railways are suffering from considerable capacity problems and bottlenecks in parts of the system. These problems have serious consequences for the ability of Government to achieve the level of growth in passenger kilometres needed to meet other of its key objectives such as the reduction in emissions and congestion. Capacity problems can also drive the ticketing strategies of train operators, enhancing their ability to continue to raise the price of a scarce commodity and thereby pricing many passengers out of the market. The Government must ensure an increase in railway capacity.

3 The Secretary of State for Transport, the Rt Hon Alistair Darling MP acknowledged the strategic importance of the railways in securing long-term economic growth, productivity, regional development as well as environmental objectives in his speech to the National Rail Conference 2006, delivered on 15 March 2006. See para 29 onwards. Back

4 Department for Transport: Annual Report 2005, figure 4d. Figure represents the overall figure for Government expenditure on the Railways in the financial year 2005-06. The figure includes infrastructure investment and maintenance, expenditure on freight as well as passenger rail, and international services. This figure is the projected figure that the Department has budgeted for. The actual turnout figure may vary slightly from this. The projected figure for 2006-07 rises steeply to £4.9 billion, largely due to increased payments to Network Rail. Back

5 This is discussed in greater detail in Chapter 4. Back

6 Department for Transport: The Future of Transport: A Network for 2030, CM6234, July 2004; para 1.13 Back

7 Department for Transport: The Future of Transport: A Network for 2030, CM6234, July 2004; para 1.12 Back

8 Ev 01 Back

9 Q279 Derek Twigg MP, Parliamentary Under-Secretary of State for Transport. Back

10 Department for Transport: Annual Report 2005, figure 4d. The figure represents the overall total for Government expenditure on the Railways which includes infrastructure investment and maintenance, expenditure on freight as well as passenger rail, and international services. Back

11 Ev 145 Back

12 Q272 and Derek Twigg MP, Parliamentary Under-Secretary of State for Transport. Back

13 In a study undertaken for the European Commission, NERA Economic Consulting calculated figures for the levels of public budget contributions to the railways in 2001 and 2003. The figures are calculated in Euro (on the basis of 2001 PPP exchange rates), and for example in 2001 the public budget contributions in France and the UK respectively were Eur 7.5bn Eur 1.9 bn. This differential had narrowed somewhat by 2003 (the latest year available) when the figure for France was Eur 8.4bn as compared to Eur 5.6bn in the UK SOURCE: NERA Economic Consulting (April 2005) Public Budget Contributions to the Railways. Back

14 The Guardian (quoting BBC Radio), New round of rail fare increases angers passengers, 3 January 2006. Back