The renationalisation of Britain's railways

By Associate Editor David Stevenson Jul 10, 2009

David Stevenson

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The government has nationalised the East Coast railway route. Why? And is there more to come? David Stevenson reports.

What's the latest on our railways?

Britain's vital East Coast railway – the London to Edinburgh, Aberdeen and Inverness Inter-City mainline – has nearly run out of money. Last week current operator National Express warned the Department for Transport (DfT) that it might walk away from its contract. Transport secretary Lord Adonis then upped the ante by responding that the East Coast route would be nationalised. He also warned that the company could lose its other profitable rail franchises, East Anglia and C2C.

Isn't the East Coast route profitable?

Not any more. In line with many other train operators, National Express has seen passenger numbers fall as the economy has wilted. And with travellers shunning more costly first-class seats, income from ticket sales has dropped by 1% in 2009's first half, while profits have been squeezed by rising fuel prices. But there's another, bigger problem – the rail franchise system (see below). National Express is due to pay the government £1.4bn over the seven years to 2015 under the current franchise agreement. That figure was agreed on the basis of almost 10% annual passenger revenue growth – an estimate that today looks "not so much heroic as suicidal", says The Daily Telegraph's Alistair Osbourne.

So the rail franchise system isn't working?

Correct. Ever since John Major broke up and sold off British Rail in 1996 the UK government has had to spend billions more than expected on a supposedly privatised rail network. In 1994, the rail network cost £1.6bn – it now costs the taxpayer about £5bn a year. So in recent years the DfT has tried to impose closer Whitehall control, including "minutely controlled franchise awards where everything from timetables to rolling stock choice is centrally specified", says Dominic O'Connell in The Times.

Meanwhile, says Chris Blackhurst in the Evening Standard, "because of the huge number of franchises, contracts and the sheer, mind-bogglingly convoluted nature of the system, the number of managers running the trains has soared into the thousands". Sure, it's not all been bad news – private-sector marketing skills and new rolling stock have encouraged rapid recent growth. Last year, for example, 1.2 billion individual rail journeys were made, the highest number since 1946, while passenger levels on London's commuter franchises grew by over 10% annually during the financial services boom.

Is better management the answer?

Not entirely. The franchise bidding system that has encouraged train operators to make over-optimistic bids has already done the real damage. It's meant the winners have had to squeeze passengers for higher fares and has limited their "freedom of action to decide where to make the savings to meet the large payments promised to the DfT", says Robert Wright in the FT. Throw in lower government subsidies and the result is that we pay around 50% more in fares than on the continent. "In Europe, governments were more ready to fund their railways as a public service," says transport consultant Christian Wolmar.

Here, by contrast, the spat between National Express and the government "has exposed the shortcomings of a system that judged companies only on what they were prepared to pay back to the Exchequer", says O'Connell. "Industry insiders said it was always a recipe for the kind of turmoil experienced on the East Coast and ensured companies ran routes only for the short term."

What's the future for Britain's railways?

Short term, "the East Coast is Britain's premier line and the government doesn't have a problem taking control if it's the only one", says Wolmar. But the trouble is "this could be the start of several other lines running into trouble if the recession carries on into next year. Other franchises could collapse and then the government will need to think long and hard about what to do".

It's pretty clear that the franchise system needs overhauling, and fast. The FT quotes a "senior rail insider" as saying that "a more sophisticated process is needed", which "tests a bid's deliverability, rather than it just being wishful thinking and blind optimism".

Perhaps "a new ownership model is required that lets the successful bidder own the line and develop the land", says The Daily Telegraph. Or else Network Rail, which already maintains the tracks and signals, "could also operate the trains and reunite wheel and rail for the first time since privatisation", says Ben Webster in The Times.

"Within a couple of years it would become clearer which was the cheaper way of running our railway." As "ultimately, the taxpayer funds the whole process", we'd all want to see that.

What next for National Express?

The East Coast franchise is run by a separate National Express subsidiary, so in the short term the firm can walk away and survive. But longer term the company's financial state, hobbled by hefty debts after a Spanish bus business buy, is weak – borrowings total £1.2bn, three times its £400m market capitalisation. A rights issue (where existing shareholders stump up more cash) of at least £400m is on the cards. But it's unlikely to happen until the situation on the East Coast route and the other rail businesses is clarified.

The competition has already scented blood, with quoted bus and rail rival FirstGroup recently lodging an informal bid. Stagecoach is seen as another potential suitor. Much depends on whether Spain's Cosmen family, the firm's biggest single shareholders (owning 20%), run out of patience and sell up.

Published in Economics | More articles by David Stevenson

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