Railways, and the ‘N’ word…

I found myself becoming irritated about the often ill-informed comments being made in run up to election about possible railway ‘re-nationalization’. It is hard to puzzle out, from the muddled promises and assertions, either what exactly is going to be more ‘nationalized’ than our existing government-run system or what, precisely, the benefits will be. This prompted me to make a few jottings, together with a few facts, which might be helpful.

The Nationalization of Transport in 1948

When transport was privatized in 1948, no deep thought had been given about how to do it, so it was done in a rush and planned by people who knew little about transport (in a real sense this bears similarity with 1994 ‘privatization’). At the point of nationalization it was both ‘free’ from any burden upon the taxpayer and was intended ultimately to be paid for by transport users. There was never any suggestion that the taxpayer would ever fork out a penny (bear with me, I shall explain what actually happened).

The plan was this. About £1.2 billion of shares and debentures held by the shareholders and stockholders of the railway companies was exchanged for new British Transport Stock. The amount of stock swapped was based approximately on the market value of the stock given up and the new stock uniformly paid a 3% guaranteed return on the face value of the certificates. The British Transport stock was issued free of charge and was a form of IOU whose liability was held by the British Transport Commission, not the government. The interest had, of course, to come from the fares revenue. In the fantasy world created by the civil servants and government of the day it was imagined that nationalization would save the previously impoverished railways from financial ruin and the railways would thenceforth pay their way and become successful and generate a surplus (I must not use the word profitable as profits would be kept in the business). This isn’t my opinion, it is what the 1947 Act required.

A sinking fund was created into which hefty payments were made each year by the Commission from fares revenue. The fund was invested and generated investment income which, with the addition of the annual payments, was expected to be sufficient to repay the British Transport stock holders, in full, during or after the 1970s. It will be seen from this description that the cunning plan was for nationalization to avoid any taxpayer involvement, with the costs of reimbursing the former railway owners falling wholly on fare-payers using this magnificent, modern and fully integrated transport network.

Modernization was going to cost money and there was, in 1948, no inclination for any government to make the slightest contribution. Money would therefore be borrowed by issuing new Transport Stock which would pay for whatever investment was required; this stock, too, would require a sinking fund to enable eventual repayment, the extra money generated by betterment being plentiful, so it was thought, on the basis of ordinary investment economics. Significantly, it was expected all debt would be repaid 25 years or so after it was borrowed, so total debts would be limited (unlike the Network Rail model, until recent nationalization). All would be wonderful and the whole British transport system would be completely self-supporting and capable of attracting all the investment needed.

What could possibly go wrong?

Well, we know what went wrong. The post war railway was absolutely worn out, materials were in scarce supply, investment was difficult anyway but the government exerted influence to keep railway investment unrealistically low, and the interest on the Transport stock was too burdensome. In addition costs rose faster than income and in no year after 1953 did the railways cover their legitimate costs. From 1956 they never again even covered their day-to-day expenses, ever.

The financial model was, in short, disastrous. Attempts to fix it on no occasion did more than reduce the rate at which losses were rising. From 1960 the government is found giving large grants to match the book losses. From 1963 a major restructuring (forming the British Railways Board) saw the Transport Stock exchanged for an equivalent amount of government debt: over half was freed of interest, but the 3% stock was swapped for 6% interest so it made little difference. From 1968 much debt was written off and grants began to be paid in an attempt to target socially required but loss-making services. In addition some very unprofitable work was hived off to the National Freight Corporation. This hugely, but only briefly, reduced losses but as market share reduced the losses came back and by 1975 (at today’s prices) hit £3 billion annually. After a huge fight, day-to-day losses towards the end in the early ’90s  were down to only £1 billion!

It was not all bad news as losses now included repayment of debt, an expensive charge postponed for many years, and by the early ’90s was only about £1.25 billion. This appears quite good compared with results a decade earlier but the apparent good news masks the fact that in the run up to privatization there were huge ‘fire-sales’ of subsidiaries and physical assets, which instead of being regarded as capital reserves were simply thrown into the day-to-day income, somewhat distorting the picture. Some of these subsidiary businesses were disposed of rather cheaply, it has been suggested (and see my blog on BT Hotels). Even so the loss-making trend was arguably downwards as the BR sectorization programme began to deliver results, though it is doubtful if breaking even after capital was paid off would have been achievable. Nevertheless, revenue grants in the early ’90s were in the £600-£700m order and that would probably have been regarded as broadly OK on an ongoing basis. Capital grants and loans were also provided by government, further distorting the illusion that the railways could ever provide for itself, though. The point I am trying to make is that at no time thus far could the railways actually make money. Traffic was tending to disappear and huge effort was required to keep it or get more. Whether privatization was the answer I’m not getting into, but I’m not convinced the way it was done shows the government at its most intelligent.

I have put a couple of graphs here to support the points I have just made.

The first shows at today’s prices the magnitude of the day-to-day operational losses. This purely represents the difference between fares income and legitimate day-to-day costs and entirely omits financing costs, grants and other like matters. It is broadly accurate (I hope) given the constant fiddling with the accounting methods and the complexity of the Transport Commission organization. Important to note is that the profound change in 1969 is not a result of improved methods so much as the transfer of loss-making parts to other parties.

Fig1

The second chart, again at today’s prices, represents the total annual loss, as well as government revenue subsidy, compared with BR net revenue including reasonable repayment towards capital costs. It basically represents the organization’s shortfall to pay its own way. The shortfall is not trivial and the trend towards the end is again helped by the ‘fire sales’. Because this series includes interest on capital it is worth pointing out that some of the high costs in the early 1980s were because of the punitive interest rates being paid for capital borrowed in the inflationary explosion in the 1970s. Stupidly, through modern eyes, BR was at one point required to repay capital on which 5-6% interest was being paid only to borrow the same money to fill the hole at up to 12% from the minister. I have used Bank of England annual inflation rates to correct to today’s prices.

Fig2

So, in a nutshell, BR had many merits and produced some wonderful rounded managers as well as running a railway on a shoestring. Financially, though, it was a basket case and was never free to borrow and invest on the scale required. It was to have been nationalized for free but the whole structure was created by well-meaning fantasists that simply did not understand the state of the railways in 1947 and produced a kind of money-eating monster that only good railwaymen somehow managed to keep alive! I don’t quite see why we’d want to do that again.

Now, there is that great imponderable. For decades until the 1990s railway modal share consistently fell and this had many adverse effects, not least morale. It was financially problematic as the asset base was hard to reduce, or, at least, hard to reduce at the same rate, so overheads went up. Suddenly from the mid ’90s, traffic began to rise and has continued to do so at unprecedented rates. The political weasels would have us believe this was because of privatization but this seems very unlikely, especially as the model was designed for decline, at least at first. A large number of external factors seem to have more basis in fact, both economic improvement and because road space was not expanding much, constraining road traffic growth. There are other subtle reasons and maybe the small and better TOCs were slightly nimbler than BR in exploiting the potential when it was noticed. We should remember these early franchises were less prescriptive and the capacity was available. However we will never know what BR would have done in this situation. It would be quite interesting to hear from BR managers at that time what they think would have happened.  My suspicion is that the DfT would not have believed the upward trend was sustainable and would have failed to allow BR to respond effectively. By complete accident of timing it may be that BR had had its day.

The Nationalization of Transport 70 years on

The situation now is rather different from 1994 as passenger traffic has doubled with only modest improvements to the infrastructure. Moreover it could scarcely be more different from 1948. The challenge today is mainly about capacity but I would add that increasing population suggests improving railway’s connectivity and reach should feature somewhere. By this I mean a wider range of destinations (through services were much culled half a century ago) and putting some places back on the railway map that with the benefit of hindsight should not have come off it. Operating costs could perhaps be reduced through organizational simplification but I doubt if there is much to be had from the operating side once the issue of guards has been resolved one way or the other.

Whatever the plan, just bringing back BR has very little to commend it; though that is not apparently ‘the plan’ being broached now I think any tendency to lurch in that direction should be resisted. Vested interests might support such a thing.

Whilst agreeing that today’s structure is rather eccentric, and, again, is somehow made to work by good railway people despite the obstacles, I would be cautious about changing it without having a very clear idea about what the objectives might be, preferably evidence-based.

My observations are:

  1. Many of the so called ‘difficulties’ experienced by passengers are a direct result of existing government control, rarely admitted to. The fares structure and fares levels is one of these and another is the government even getting to design the trains, rather than railway people who have to live with the consequences. I would be very, very wary about asking for more of this.
  2. We must recall that many of the problems BR had were not of its making. Inherited obsolescence and debt were one intractable problem. Another was the government’s arcane accounting requirements and annualized funding, which made planning difficult and investment expensive. Another was politically variable and unpredictable funding levels which made investment problems worse because it wasted both money and opportunity. The only certainty was that investment wasn’t matching asset decay. Who wants that again?
  3. The generally accepted contribution to shareholders from each passenger pound is about 3p though this excludes the rolling stock leasing companies which I estimate might raise this to about 4p. It will be appreciated by most people that dividend payments are a return on investment made by shareholders. Organizations need money to function, even government-funded ones. If shareholders are not providing the capital at their own personal risk then it has to be borrowed. This isn’t free and I note that our government is currently paying 4% on its debt so I think it reasonable to observe that if shareholder funding were replaced by government funding then actually the existing arrangement could be seen as reasonably fair. So long as there are shareholders they will need paying or they will seek to withdraw their money anyway. Paying them off would require public cash unless some device as that used in 1948 were used. Even if non-shareholder finance were a tad cheaper I doubt if this would justify the upheaval required. By the way, government debt pays guaranteed interest to the same sorts of people who comprise railway shareholders…. I am uninterested in ideological claptrap I just don’t see the 4p in the pound issue as the main problem facing the railways.
  4. Reorganizations in the railway industry are enormously disruptive and usually hit service performance and put up a load of hidden costs. Moreover experience of previous nationalizations (eg London Transport and the railways) clearly show that staff on previously varying rates of pay usually end up with the new organization having to level up to the highest and the unions will push hard for this. Irrespective of whether this is good or not on ideological grounds it won’t make things cheaper and never has.
  5. There are also some benefits in keeping organizations fairly small and close to customers. Some franchises have been very successful and are popular so it may be worth examining what makes the better ones work before throwing out a load of experience. I’d be wary of even thinking about the entirely illusory economy of scale of any large organization if we want to improve customer service standards and not destroy them.
  6. If the plan is to allow franchises to expire and replace them with some kind of directly operated railway oversight (as was the case with East Coast until recently) then I do not see where the savings come from. There are few savings to be had from existing operations, I suggest.
  7. One might expect savings to be achievable from dismantling the contractual frameworks in place now as (arguably) one could get rid of contract managers, delay attribution staff and legal teams. Whether this could actually be done in the term of a Parliament, whether savings would be material, or whether whatever replaces it is cheaper, I doubt if anyone knows. I am fairly sure those promoting nationalization don’t know.
  8. There are other areas of long term saving that might be achievable if there were a single controlling mind. For example a knowledgeable team looking at rolling stock cascades (something BR did well) could plan stock usage over whole life reducing the hefty payments made now to the leasing companies to cover risk of stock having to be stored as it gets older. You don’t imagine these companies aim to lose money when plans don’t work out!

These are only random thoughts to suggest that renationalization concept is based on dogma with little factual information to justify it and some cogent reasons for not rushing into it.

The 2017 Labour manifesto idea for the railways

Specific proposals are:

  • Bring private franchises into public ownership as they expire and also use break clauses to accelerate this process when this is in the interests of passengers and taxpayers.

Observation – superficially attractive and cost-free and would save some franchising costs. Not stated what benefits are and cannot actually see where profound benefits arise in short term. Would appear to cut off the private sector funding obtained when franchises renew. Brings whole of operating and reputational risk back to public sector which could be problematic. Would take a long time to achieve with benefits unclear and cut off the TOCs from wider private sector experience and support. At best, marginal.

  • Create a new dynamic public operator where profits currently being made by private operators would be reinvested into cutting fares and infrastructure under Labour.

Observation – This appears to be the tool by which previous point achieved and is not a separate item. For reasons already pointed out, suspect savings illusory and fares are already a government function.

  • Keep Network Rail in public hands.

Observation – This means ‘do nothing’. Network rail is the largest unit of spend though.

  • Labour will cap regulated fair rises at the Consumer Price Index (CPI), using the money saved through bringing rail franchises back into public ownership. As more services come into public ownership, greater amounts of savings become available, and Labour will aim to introduce further fare caps or reductions.
  • A separate note states: passengers will on average save £1,014 on their rail season tickets over the next parliament, compared to the potential cost under a Tory Government.

Observation – Note on fares already made. Do not believe ‘nationalizing’ will actually save much or at all. If the desire is to cut fares but not costs it amounts to a revenue subsidy. This is a political choice but look what happened under BR. Subsidies can rapidly become extremely burdensome and where would it come from?

In reference to the note. If an average season were (say) £2500-£3000 then at today’s prices avoiding a 1% rise above CPI over five years saves of the order of £150 and for the life of me I can’t see how you can claim a £1000 saving. With no sight of the workings I think this is fantasy-land.

  • We will continue with investment in HS2 and build a Crossrail for the North, Crossrail 2, extend HS2 to Scotland and expand our rail network by re-opening disused lines where there is a social and economic case to do so.

Observation. Fair enough.

  • We will invest to upgrade major and local train stations. We will also work to improve the accessibility and access for disabled passengers in around our stations.

Observation. This is virtually existing policy but the statement is so woolly as to be meaningless by itself. To be credible we need to know how much, when and to what standard.

  • We will halt the expansion of Driver Only Operation and stop cuts to staff which jeopardise safety on our railway network and remove the independence of disabled passengers.

Observation. There is absolutely no stated justification for this. Presumably it is here to keep RMT happy but the costs come out of the same pot as everything else.

  • We will ensure passenger groups and staff are included in the governance structure of a publicly owned railway, ensuring the passengers voice is heard and ensuring good industrial relations.

Observation. Whether or not this in any way adds anything meaningful depends on detail that is simply not given. AS the railway is presently run by the minister, I’m not sure I believe introducing anything that will interfere with absolute supremacy will have any teeth (it has been promised before and teeth were always extracted very quickly).

I can’t honestly say this is all bad but it smacks of dogma rather than any plan informed by the facts or the needs and will be very disruptive without delivering any benefit and, quite possibly, make matters more challenging rather than less.

Final Observations

I think a lot could be done to improve the existing system (especially the franchising process) and why not have one or two TOCs run by a UK plc, as it were, in order to have a good means of benchmarking everything else. This was done by London Transport in order better to understand the bids coming in from bus route bidding, for example. However larger scale change without a searching enquiry into a better way of doing things will produce poor value. Please read ‘the Blunders of Our Government’ before you rush off to implement a half-baked policy with experts you do not have if you want evidence of such folly.

More important is strong and stable [sorry about that] leadership in the industry, or somebody in charge. For my money I’d bring back something like the Strategic Rail Authority and get as much out of the Transport Secretary’s hands as I could. We need detailed planning being done by the industry not by government generalists. The SRA was politically troublesome because it fought government dogma with facts and perhaps some TOCs thought it had too much power, but actually stuff like that can be fixed in the light of experience.

Returning to where I started, it can be seen perfectly well that one could sort of nationalize the already mostly-nationalized railways ‘free’. It has been done before but of course that was before it was realized that railways as a whole don’t generate much, if any, profit. It didn’t work out well then and I just can’t see what the need is now. It is politically very risky as it is all too easy to make what vaguely works now a great deal worse. I can see no possibility of it reducing fares, at least not of its own accord. Why would it? If the government wishes to subsidize season tickets (they already are, by the way) then be honest and just do it. It can do that now without throwing everything else up in the air. I don’t recommend it, but if that is the aim it can do so. The pragmatist in me asks whether, if peak trains are already heaving at the seams and the railway is full, why rational people feel the need to reduce fares and make the crowding problem worse. Is it not right that it is commuters (who insist all on travelling at the same time) who are putting impossible demands on the system?

Perhaps we need a bit more imagination and experience in deciding how best to steer the railway network, if change we must have. Returning to the 1970s, let alone the 1940s, would not be helpful.

 

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About machorne

I have always lived in London and taken a great interest in its history and ongoing development. This extended into the history of its transport services, about which I have written a number of books - I have spent most of my working life working in the industry and observing changes from within, mostly to the good, but not always so. I continue to write, and have a website with half finished stuff in it so that it is at least available, if not complete. Several new books are in hand. I have many 'works in progress' and some of these can be found on my website; the we address is http://www.metadyne.co.uk
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