Rail fares, renationalisation and a profound misunderstanding

Listening to the noise around today’s announcement of rail fare rises from January next year has been dispiriting.  Time and time again, the issue of fares has been linked to renationalisation – as for example in this Guardian opinion piece which is notable for a complete failure to understand the issues around fares and ownership.  In particular critics of Labour have argued that today’s announcement of fare rises of up to 9% is somehow connected to their failure to renationalise when in office.  In the big picture, of course, the increase in the costs of railway services is largely as a result of the inefficiencies inherent in the structure created by the 1994 Railways Act.  But the facts are much more complicated and much of the discussion has been seriously lacking in understanding and nuance.  In particular, the claim that allowing the current rail franchises to be taken back into public ownership when they expire – as set out in Caroline Lucas’ private member’s bill – is seriously flawed and suggests a failure to grasp how the privatised structure works. In summary the issues are:

– the business structure of the railway industry is set out in the 1994 Railways Act, as amended by the 2005 Railways Act, which regularised the end of Railtrack and its conversion into Network Rail and gave the Secretary of State greater powers to set out the purpose for which state subsidy to be used.  The renationalisation of the industry and the removal of the inefficiencies inherent in a structure that operates through contractual interfaces can only be achieved through a major piece of primary legislation.

– the inefficiencies in the structure arise through the fact that the industry operates through complex contractual interfaces between Network Rail, train operators and rolling stock companies.  There are inherent inefficiencies in the franchising process, including difficulties in appraising long-term costings of franchises: a fact recognised by Maria Eagle in one of the few glimmers of political sense in today’s debate.

– these inefficiencies led to a long-term and substantial increase in subsidy under the last Labour government.  The simple fact is that the new structure of the railway is demonstrably more expensive to run than it was before.  But the reason for the current fare rise is because as a matter of deliberate policy, the Coalition is cutting subsidy and requiring the costs to fall more squarely on users.  Today’s fare increases, like those of the last two years, are about cuts, not structure.

– you can allow franchises to expire but this does not deal with the huge problem of Network Rail which owns and manages the infrastructure.  It remains unclear as to whether it is in the public or private sector, although it receives massive public subsidy.  But even if the franchises were back in the public sector, Network Rail would still be in a position to extract high charges from rail operators. The same will be true of the huge charges levied by rolling stock owners.  These problems will only be addressed through primary legislation that settles the status of Network Rail for once and for all.  This is why, essentially, allowing franchises to be taken back into public ownership when they expire is a trivial response to the structural problems of the rail network.

Ultimately, I believe the railways should be restructured and brought back into public ownership – although it is important to note that EU law gives private sector train operators a right of access to the network.  Railways are worth subsidising because the economic, social and environmental benefits of having a rail network cannot be recovered through the fare box; subsidising railways is what modern economies do, and brings huge benefits.  But there is no magic bullet; renationalising and restructuring would take years, and would require a major piece of primary legislation.  It would also be expensive; you cannot nationalise without compensation.  It is difficult to see how this could be top of the agenda for an incoming progressive government in 2015, which would face a horrific toxic economic and social legacy from the coalition.

In the short term, then, the only rational approach is to increase subsidies.  It’s far from ideal – it would be throwing good money after bad, which in Treasury terms counts as extreme moral hazard.  But life in Whitehall often involves messy compromise, and it would be years before there would be any tangible benefits from renationalisation for rail users.  But when people on the progressive side of politics claim that letting the franchises expire would solve the railways’ problems, I’m afraid they haven’t understood the issues.  Nationalising the railways, and creating a rational structure for the industry, cannot be delivered with a quick fix.