Rail fares and franchises - Transport Committee Contents


Examination of Witnesses (Questions 180-199)

MR JOHN LEACH AND MR GERRY DOHERTY

4 FBRUARY 2009

  Q180  Chairman: If the current franchise system is retained, and clearly it is here for the short term, are there any changes in the rules about permitted fares increases that you would like to see, and that you think could be put into place?

  Mr Doherty: That is a given that we are going to continue with the current system. If the system was wrong, if people were taking risks, for example in order to ensure that they won the franchise, how much different was it from the bankers who were taking risks and giving out toxic loans? They were taking risks on the economic circumstances. The whole industry was questioning the bases of some of these franchises. For example, when GNER handed back the keys and then National Express came in with an even tighter financial bid, certainly the whole industry, certainly the people I was talking to within the industry, were questioning how that was going to stack up. Mr Bowker at the time, I recall, was saying that they had factored in if a recession came in. Well, the chickens have come home to roost now. If the word is right within the industry, then National Express are certainly one of the train operating companies that are talking to government. I do not think the system can work and therefore I do not think you can tinker with it. I do not think there is anything you can do; you have got to change the system.

  Mr Leach: Similarly, we would take a view that the system was flawed from the outset. We repeatedly made those views loud and clear to the entire industry. The whole system needs completely replacing. It might seem ambitious, it might seem that we are talking with larger expectations than most people are used to, but that is where we think the solution lies. As Gerry has already said, tinkering with it will not solve the problem. What I would also say is that we live in very interesting political times. All kinds of things that would have seemed completely off the radar up until very recently are very much on it, and we believe that now we are seeing, as already has been said, chickens coming home to roost, and it is only a matter of time before some of these companies are in serious difficulties. We only this afternoon have been told that another 180 redundancies will be taking place with South West Trains. I do not know if they were here earlier. Our officials have been meeting with management representatives, along with the TSSA this afternoon, and that is what we have been told, and they cannot rule out compulsory redundancies. That is not only in South West Trains; these developments are unfolding throughout the industry, and we believe that the only solution to it is a radical overhaul, and that includes the fares and financing system for the railway, and we believe that renationalisation is the solution to the problem.

  Q181  Chairman: Mr Doherty, RMT have said that fares increases will be converted into bumper profits fuelling dividend increases of at least 10% and as high as 33%. What is the basis for that statement?

  Mr Doherty: That is RMT, I cannot speak for RMT, Chairman.

  Mr Leach: Sorry, was that question directed to me?

  Q182  Chairman: Sorry, Mr Leach, this was RMT's figures.

  Mr Leach: Yes, they are.

  Q183  Chairman: I am sorry about that. What is the basis for those figures?

  Mr Leach: We have gone and had a look at the published information and we have seen, for example Chairman, I believe this note was sent over to you all in good time, we call them the big five, were doing very well up until the end of last year. This is the six months ending on 30 June 2008, okay, so it is a little while ago now, but Arriva Group had dividends paid to shareholders in the region £33.9; First Group, interim six months ended on 30 September 2008, a dividend of £55.5 million paid during the previous period. We have provided this information to the Committee and we get it in the normal way.

  Q184  Sammy Wilson: Were those figures for the transport company as a whole or were they paid specifically to shareholders from profits from rail? I think the difficulty is that the figures, as far as we can see, and we have asked for the information, have not been disaggregated, so those could actually be distorted because it does not take into consideration the fact that some of those dividends were based on profits earned on activities other than railways.

  Mr Doherty: When the big public transport operators publish the figures, you are quite right, Mr Wilson, they do not disaggregate between profits by buses, essentially, and profits by rail, but you only have to look at their annual statements, and their rail businesses are the ones that are providing higher growth in terms of profits. First Capital Connect, for example, had almost £50 million for the first six months, and yet they are still making cuts just now. You are absolutely right that you cannot disaggregate, but what they do say is that rail businesses have performed exceptionally well, and that must transfer into the dividends they pay.

  Q185  Sammy Wilson: We will get the information from them but they were saying they are getting 5% or 3% returns on the basis of the revenue that is brought in and the costs that they had, which did not seem to me to be exceptionally high in relation to the amount of capital that they have invested.

  Mr Doherty: I am only quoting from the annual accounts that I have seen and the commentary in those annual accounts. They are very bullish about how their rail businesses are doing vis-a"-vis the bus business in the UK.

  Q186  Sammy Wilson: This is where I am at a loss to understand your position, because you have been telling us that you expect some of these franchises to have to pull out or to go belly-up within the next year. You have been painting a fairly bleak picture for us.

  Mr Doherty: I am not sure that we have said that. I think that we have said that they are in difficulties and there are a number of options that are available to them. One of them is going belly-up, one of them presumably will be that they will go back and look for what they term as "flexibility" in their franchises which the department seems to be holding its face against. One of them could be that the dividends that are being paid are no longer available in the future. They will have to make their choices based on what their options are. It is not a case that they will go belly-up. If everything stays exactly the same and they want to continue paying the dividends that they have been paying then something has got to give in this equation.

  Mr Leach: That is right and I would just come back to your original point: my colleague Gerry Doherty is right that it is not exclusively rail profits, and we have not said that they were, but they are a large part of the companies, and we think we live in a particularly difficult period, and perhaps a freeze on dividends and profits at the moment would not be out of place. We are a trade union and we have got members being faced with compulsory redundancies. We have not faced that for generations, all through privatisation and before, and therefore profit at the moment is a nice debate to be having about what part of the industry it is in, but, at the same time, we are facing bleak, uncertain futures for our members. South West Trains are telling us today that compulsory redundancies are knocking on the door, and that is why I would present a bleak picture.

  Sammy Wilson: It is not just a "nice debate". We are examining whether or not the companies are earning abnormal profits as a result of fare increases. You are telling us that they are earning abnormal profits and giving huge dividends. Now you are telling us that you do not actually know if that is from the rail side or the bus side or the other transport side. I suppose for it to be useful information to us we need to have it disaggregated in that particular way. It is not just a debate, that is the point I want to make, it is important that we should have accurate information. If we go down the route that you are suggesting where we interfere in the dividends paid, and we interfere in the prices that they are allowed to charge, and we interfere in how the companies are allowed to adjust their cost base, is that a realistic picture for the role of government in any industry? A firm could not exist with that degree of interference. It does not add up.

  Q187  Chairman: I appreciate that your policy is for this to be done in a different way, under public ownership, but under the current system as it is, I think Mr Wilson is putting quite an important point to you. Do you think that that degree of involvement from the state would work in the system that we have at the moment?

  Mr Doherty: Can I answer that. The state then has to consider what the options are. The state has got a stake in this as well, particularly the taxpayer, because the taxpayer is funding this industry. Whatever way you look at it, there is smoke and mirrors in it, but it is the taxpayer funding these private companies. At some stage, the taxpayer has to take an interest in it when it is paying as much money as it is. If you just take a hands-off view and say we will continue ploughing this amount of money in, which, by the way, is about four or five times as much in total into the industry as when it was in public hands, and you have heard that said from the trade unions before, but if you are going to continue doing that and you are going to continue doing that on the basis of propping up dividends, and you are going to continue not to make any intervention in it, then the corollary is that you are actually funding private industry's profits, and I do not think that is the role of the state.

  Q188  Mr Martlew: I do not disagree with where we should be, but we are where we are, gentlemen. You paint a very gloomy picture but the reality is different. We actually carried more passengers on the railways last year than we did for 60 years. We have got massive investment, most of it public money, and we would agree with that. Over the last few years the number of people employed on the railways has probably gone up and we have the most modern rolling stock in Western Europe. That is a picture that we have got that you have not really mentioned. I admire the way that the trade unions have been able to get a good deal out of the management for their members. I come from a railway family, three generations of my family worked on the railways, and the unions have done a very good job getting reasonable conditions for the workers. I appreciate that, but if we have not got profits in the present system, that is not going to happen, is it?

  Mr Leach: Under the current system the way the industry has been constructed and refined in recent times, it all does seem to hinge on profits, but where we are at, and the phrase has been used "we are where we are", we are in a very different place today than we were three months ago in the railway industry.

  Q189  Mr Martlew: I suspect, Mr Leach, that the statement you would have made to this Committee would not have been very different three months ago.

  Mr Leach: I would not have been talking about compulsory redundancies.

  Q190  Mr Martlew: No, but you would have been talking about the doom and gloom.

  Mr Leach: We have consistently been against the privatisation of our industry.

  Q191  Mr Martlew: Precisely.

  Mr Leach: We do not think that it is the most efficient way of operating it, and we think that the current difficulties that the industry is rolling into will make matters worse. I cannot really come away from that point with regards to my own organisation.

  Mr Doherty: Can I just answer some of the points that you made. Yes, we have been arguing this consistently, even in the good times, even when the profits were rolling in, because we do not think it is the proper way to run a railway industry. No other government in Western Europe runs a railway system in the way that we do. No other government puts as much public money into running their railway. None of them does. No other railway system in the world, and I heard your debate earlier on about rail fares, none of them, we have got the dearest rail fares, certainly the walk-on fares in Europe, and I think fares was one of the issues that you wanted to talk to us about, but it is quite true that the industry is carrying more passengers than it was prior to privatisation; so are the roads, so are the airways. More people are travelling. We have been living in an economic boom.

  Q192  Mr Martlew: Mr Doherty, that was not the case. What was happening was passenger numbers were going that way, they were going up on the roads and down on the railways. We have come back, and I think we have actually started to put more people on the railways. It had been declining for probably half a century. I think the unions should take some of the credit for that.

  Mr Doherty: That is not true. Railway patronage went up and down in times of economic boom. All you have to do is to look at the reports of the British Railways Board. It was always the case that in economic boom railway patronage went up and in times of decline it went down.

  Q193  Mr Martlew: Why are we carrying more passengers now than we were in the 1960s, because that was a boom time?

  Mr Doherty: Because more people are travelling now. More people have more money, it is more accessible; people are richer these days. I am richer than my parents were and they were richer than my grandparents were. Everyone has shared in the economic boom and part of that is there has been a boom in travel. I accept that the railway has shared in it.

  Q194  Mr Martlew: Can I just come back to the franchise and the way that it affects your members. It must be very disruptive to find out that one day you work for one company and the next day you work for another company and maybe, if they have the franchise back, you work for somebody else.

  Mr Leach: Absolutely.

  Q195  Mr Martlew: I was commenting earlier about the Virgin franchise, which I think treated staff reasonably well. I know quite a lot of them because I travel regularly. Do you think that the employment record of the companies putting in a franchise should be taken into account when that franchise is given?

  Mr Doherty: Is that in terms of the way they are treating their employees, is that what you are talking about?

  Q196  Mr Martlew: Yes.

  Mr Doherty: You mention Virgin. Our experience is that some franchises, in fact some groups, treat their employees better than others. You mentioned earlier on that trade unions have got a good deal for their members and that is true for some. I represent for example railway engineers. Railway engineers under privatisation have done exceptionally well because their skills are at a premium. I also represent booking office staff, who have had a raw deal out of privatisation, on the whole, and you could go round all of the different aspects of jobs within the railway, some of it good deals, some of it bad deals. Some of the employers have been good employers, as such, putting money into training, et cetera; some have been paring back. It usually depends on how their profits are doing. That is purely from an arm's length perspective. I have not done any examination or analysis into that. Our experience has been mixed; there have been winners and there have been losers within privatisation. I will tell you who the losers have been without any doubt—the fare-paying passengers.

  Q197  Mr Martlew: The question I asked, Mr Doherty, is do you think whether a company is a good employer or not should be taken into consideration when the franchise is given?

  Mr Doherty: Yes.

  Mr Martlew: Thank you.

  Q198  Mr Leech: I start from the position where I have some sympathy about having nationalised railway systems, so I hope that you do not think that my question is necessarily coming from the opposite view. You have argued that we should not be subsidising private companies. Surely that is an argument then for higher fares? If we are going to take away the public subsidy, surely, we are going to get higher fares for passengers?

  Mr Leach: That is an explanation to me as to the illogical nature of the privatisation of railways because we do not want higher fares either.

  Mr Doherty: If you retain the current system yes, that is what will happen. We are saying change the system.

  Q199  Mr Leech: Let us assume that the system is not going to be changed, because it does not look like there is any current prospect of the system changing. If private companies are running the railways, and I understand you think they are making excessive profits, what would not be an excessive profit for a private company running a franchise?

  Mr Doherty: What would not be an excessive profit?

  Chairman: You mean what would be a reasonable profit?



 
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