House of Commons - Rail 2020 - Transport Committee

Rail 2020 - Transport Committee Contents

2 Subsidising the railway

Why has the subsidy increased?

15. Chart 1 below shows how the total subsidy of the rail industry, in 2011-12 prices, has changed since the late 1980s, when rail was in public ownership.

Chart 1: rail subsidy (2011/12 prices)

Although the level of Government support has varied from year to year, in general it has increased from around £2.75 billion (in 2011-12 prices) in the late 1980s to £4 billion today.[18]

16. Around 85% of this support takes the form of capital grant paid to Network Rail.[19] This grant is used to enhance and expand Network Rail's infrastructure. Without direct grant from government, Network Rail would have to charge train operators more for access to the track. The operators would in turn need more subsidy from government in order to pay the higher charges.

17. We asked our specialist advisers, Bob Linnard and Richard Goldson, to analyse what lay behind this increase in the subsidy of the industry. Their paper is published as Annex B. They explained that revenue growth of £2.3 billion in 2011-12 prices (mostly from increased passenger numbers rather than higher fares) has been more than offset by three factors:

a £1.7 billion increase in train operating costs, which have grown in tandem with the growth of passenger numbers;
£1.5 billion extra cost associated with funding Network Rail's regulatory asset base, its borrowing to finance capital projects; and
£0.5 billion in additional rolling stock charges, again reflecting increased demand.

The Rail Minister, Simon Burns MP, said he agreed with the broad thrust of this analysis.[20]

18. This work shows that the railway has been a victim of its own success. Increased demand for rail has led to new capital projects, increasing Network Rail's level of borrowing and the annual charges it must meet to pay for that borrowing. Increased passenger numbers have also fuelled demand for more, better quality rolling stock, which comes at a cost. Better facilities, and more reliable rail services, have generated more demand for rail travel. What in many ways is a virtuous circle has a vicious element - escalating cost.

19. However, another important part of this story is the increase in train operating costs. Higher passenger numbers have not led to a decrease in costs per passenger kilometre, as might have been expected.[21] The McNulty report mentions increased staff costs as a possible explanation of this development,[22] although the trades unions dispute this,[23] attributing inefficiency to fragmentation and private sector involvement in the industry. They argue that these costs - primarily divided payments, the cost of servicing Network Rail's debt and the cost of interfaces between Network Rail and train operating companies - amount to £1.2 billion per annum and have exceeded £11 billion in total since privatisation.[24] We consider this issue further below.[25]

20. The debate about the size of the rail subsidy raises a number of questions. Is a subsidy justifiable and, if so, what should be subsidised and to what extent? Although the ORR has direct responsibility for regulating the efficiency of Network Rail, how can the Government ensure that the efficiency of the train operating companies is improved? Does the McNulty report point towards the need to restructure the rail industry again, or can efficiencies be achieved within existing structures as he recommends? How can the industry continue to grow without soaking up more public money? These questions provide the context for our inquiry and report.

Why subsidise rail?

21. We heard the argument against subsidisation of the rail industry from Dr Richard Wellings of the Institute of Economic Affairs. He argued that the subsidy had distorted travel patterns, for example by encouraging people to "move further and further away from where they work through cheap train fares", negating the environmental benefits of rail.[26] He argued for railway lines which could not turn a profit to be closed down.[27] His vision was for a smaller, but profitable, rail network, free of Government involvement:[28]

I would advocate going back to privatisation but doing it properly this time and removing all the political control and regulation.

22. Dr Wellings was a lone voice in our inquiry: all other witnesses accepted the case for subsidisation of the rail network. Rail commentator Christian Wolmar, for example, said "railways never pay for themselves" because infrastructure cannot be paid for from revenue. He described the "fantastic level of dishonesty" associated with arguments that cutting back the network could make the system as a whole profitable.[29] A number of generalised arguments were advanced about what subsidising the railway might achieve. Witnesses mentioned environmental benefits, especially in terms of getting freight off the roads;[30] economic development and the promotion of growth;[31] and reduced social isolation.[32] The Minister, Simon Burns MP, said that there would always be "an element of subsidy" with rail, for social reasons, especially in rural areas, and because of environmental concerns.[33]

23. Although the Government is committed to subsidising the railway, it is unclear what level of subsidy it wishes to provide nor what exactly it wishes to achieve for the money. The rail Command Paper goes no further than ruling out a subsidy-free railway.[34] The Minister was unable to shed further light on this issue, declaring that he "would like to see reductions in the subsidies by the taxpayer to as low as possible as soon as it is viable to achieve that without cutting corners".[35] Although the direction of travel is clear, the destination is not.

24. More information is available about who benefits from the rail subsidy. The DfT has published figures for subsidy per passenger mile for each rail franchise, which show a wide variation between franchises.[36] The Government has also published information on the ratio of taxpayer to farepayer funding for different types of railway service, as set out below:

Table 1: Source of funding for railway services[37]

Net cost to Government per passenger mile (p) Ratio of taxpayer to farepayer funding (%)

Long distance 7.3p 25 : 75

London and South East 4.8 19 : 81

Regional 31.1 61 : 39

25. pteg dispute these figures, arguing that they depend on assumptions about how Network Rail's direct grant from Government is spent on the network. Professor Chris Nash said he "could not find any published explanation of how [these assumptions] were derived".[38] In addition, pteg point out that the McNulty analysis excludes Network Rail's capital investment budget, which is "heavily skewed towards London and the south east". "Once this expenditure is taken into account" pteg argue "the estimated level of public support per passenger can actually be shown to be greater for inter-city passengers than for those travelling on regional services".[39] We recommend that the DfT publish the assumptions underpinning its analysis of the ratio of taxpayer to farepayer funding on different types of rail service.

26. The ORR has started to publish more information on taxpayer support at the level of individual train operating companies.[40] This is a welcome step towards greater transparency. However, there are many questions about who is paying for rail services which simply cannot be answered using available data. For example, the ratios of taxpayer to farepayer funding for different types of passenger (e.g. season ticket holders, off-peak, advance purchases) or in relation to different services are unknown. The absence of information of this sort is extremely significant. Strategic decisions, for example about capacity enhancements, are being taken without it being possible to quantify their impact on the total subsidy for different parts of the network.

27. By contrast, it is much easier to see what subsidisation of bus services is aiming to achieve. An overall subsidy of bus services (via the Bus Service Operators Grant)[41] is supplemented by concessionary travel for older people, the provision of non-commercial services which local authorities consider to be socially necessary, and specific grants for environmental purposes.

28. We believe that there are justifiable economic, social and environmental reasons for subsidising the railway. However, the Government does the railway a disservice by its inability to articulate more clearly why it subsidises rail and what taxpayers get for their money. We recommend that the Government publish and consult on a clear statement of what the rail subsidy is for and where it should be targeted.

Transparency

29. Underlying the lack of clarity in what the rail subsidy is for and whom it benefits is a lack of information about the costs of rail and flows of money within the rail industry. The McNulty review concluded that "particularly in view of the substantial amounts of public subsidy going into the rail industry, there is a need for much greater public visibility of the industry's finances ... the ORR should lead in this area". McNulty set out four aspects to this work, including more disaggregation of financial information by route, benchmarking, and paying subsidies through train operating companies rather than via the Network Grant paid to Network Rail.[42]

30. Progress in the direction of greater transparency has begun. The Office of Rail Regulation (ORR) has published an analysis of income and expenditure by route, which for the first time brings together spend by train operators and Network Rail by route.[43] It has also recently published an analysis of train operating companies' costs and revenues.[44] Both studies show wide and as yet unexplained variations in the financial performance of different routes and operators. Getting to the bottom of why these variations occur will be crucial in ensuring that the rail subsidy is well spent.

31. This is not simply a technical exercise of interest solely to the bean counters. Public trust in the train operators rests on confidence that their taxes and fares are not being siphoned off into excess profits derived from the complexity and opacity of the system. For example, there is a widespread belief that some train operators are happy to accept compensation when the railway is closed for engineering and just operate buses, rather than strive to find a way of operating some form of train service. There is also concern that many passengers do not receive the compensation payments to which they are entitled when their journeys are delayed.[45] The Association of Train Operating Companies (ATOC) has so far been unable to demonstrate conclusively that train firms have not retained compensation payments to which passengers were entitled.

32. We fully endorse the call in the McNulty report for more transparency in the finances of the rail industry. Comparisons between routes and franchisees of how and where money is spent will help drive efficiency savings by shining a light on complacent management, waste and profiteering. Commercial confidentiality should not be used to block legitimate requirements for information given the amount of public money at stake. The Office of Rail Regulation has a lead role to play in championing transparency. We consider this in more detail in our concluding chapter.

18 For a different perspective, taking account of the contribution made by the railway to the Exchequer see Rail, issue 710, pp42-43. Back

19 Q249. Back

20 ROR 26B (letter from the Minister of State to the Committee Chair, 26.Nov 12). Back

21 Q6. Back

22 McNulty summary, p20. Back

23 ROR 24 (trades unions) paragraphs 36-41. Back

24 ROR 24 (trades unions) figure 1. Back

25 See paragraphs 36-37. Back

26 Q376. Back

27 Q375. Back

28 Q411. Back

29 Q141. Back