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
16. Around 85% of this support takes the form of
capital grant paid to Network Rail.
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.
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 -
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.
The McNulty report mentions increased staff costs as a possible
explanation of this development,
although the trades unions dispute this,
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.
We consider this issue further below.
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.
He argued for railway lines which could not turn a profit to be
closed down. His
vision was for a smaller, but profitable, rail network, free of
I would advocate going back to privatisation but
doing it properly this time and removing all the political control
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.
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;
economic development and the promotion of growth;
and reduced social isolation.
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.
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. 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".
Although the direction of travel is clear, the destination is
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.
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
|Net cost to Government per passenger mile (p)
||Ratio of taxpayer to farepayer funding (%)
||25 : 75|
|London and South East
||4.8||19 : 81
||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".
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".
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. 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)
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
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.
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.
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. It has
also recently published an analysis of train operating companies'
costs and revenues.
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. 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
ROR 26B (letter from the Minister of State to the Committee Chair,
26.Nov 12). Back
McNulty summary, p20. Back
ROR 24 (trades unions) paragraphs 36-41. Back
ROR 24 (trades unions) figure 1. Back
See paragraphs 36-37. Back
ROR 22 (Campaign for Better Transport) paragraph 1.6 and ROR 15
(Freight on Rail) paragraph 8. Also ROR 10 (pteg) and 16
(South Yorkshire Passenger Transport Executive). Back
ROR 19 (Local Government Association), 20 (Transport for London)
and 23 (London First), Back
ROR 19 (Local Government Association) paragraph 3.1. Back
Command Paper, paragraph 12. Back
Available at https://www.gov.uk/government/publications/rail-subsidy-per-passenger-mile. Back
Taken from Command Paper, table 5.1, p66. Back
Q328. Also see Q37. Back
ROR 10a (pteg). Back
Available at http://dataportal.orr.gov.uk/. Back
Which is in the process of being reformed so that it is more focused
on specific outcomes. Back
McNulty summary p63. Back
GB rail industry financial information 2010-11, ORR, Jan
Costs and Revenues of Franchised Passenger Train Operators
in the UK, ORR, Nov 12. Back
For example see Train Companies Get Away With Millions In Delay
Payouts, TSSA press notice, 30 Apr 12 (http://www.tssa.org.uk/en/whats-new/news/index.cfm/delaypayots),
Train companies respond to union claims over compensation,
ATOC press notice, 10 May 12 (http://www.atoc.org/media-centre/latest-press-releases/train-companies-respond-to-union-claims-over-compensation-100698)
and HC Deb, 28 Nov 12, cc338-39W. Back