Professor Karel Williams , University of Manchester Chair: Nida - - PowerPoint PPT Presentation

Chalk + Talk: Why the Brits can’t think straight about railways?

Speakers: Professor Karel Williams, University of Manchester Chair: Nida Broughton, Social Market Foundation

@SMFthinktank | smf.co.uk

#SMFChalkTalk

Why the Brits can’t think straight about railways?

Report by: Andrew Bowman, Sukhdev Johal and Karel Williams cresc.ac.uk

Why it’s difficult to think straight about rail

• Because privatisation created a complicated, financially
• paque system: ROSCOs lease trains. TOCs operate, Network

Rail the public infrastructure company

• Because two competing trade narratives add confusing claim

and counter claim pro and anti:  TOCs have a trade narrative about brilliant success via more passengers and less subsidy: get franchising back on track  Rail unions have a counter narrative about dividend extraction and costs of fragmentation justifying “bring back British Rail”

• CRESC research followed the money round the sector in Great

Train Robbery and Conceit of Enterprise which challenged both narratives

Research challenge: complexity, fragmentation and financial engineering

Trade narrative: economic interests format policy choices

• TN ex trade associations in sectors where profit opportunities depend on

regulatory decisions plus subsidy e.g. ATOC, ABPI, BBA, BVCA + research sub contracted to consultancies e.g. Oxford Economics, Oxera, KPMG and PWC

• Form = brochure with list of benefits (and no costs) as in ATOC 2013 Growth

and prosperity: how franchising helped transform railways into a success story generics

• f jobs, employment etc. + sector specifics e.g. increasing passenger nos in rail;
• Exaggerating agency of private firms e.g. pass. nos (a) yield management a

mixed blessing and (b) structural drivers of GDP growth plus London property prices admitted by GDP clause in franchises

• Counter narrative ex Trade Unions = list of costs (and no benefits) e.ge nef

2015 for TUC puts costs of dividend extraction and system fragmentation at £2bill.

Trade narrative: intellectual interest and political confusion

• Intellectually? Performativity researchers on how economic

theory shapes and formats not describes and observes e.g. Black Scholes and derivatives market; with TN the causal arrow runs in the

• pposite direction, economic interests engage economists as docile

calculators on an hourly rate

• Political effects?
• TN ventriloquizes/ provides justifications for sympathetic

politicians e.g. McLoughlin’s factoids at ATOC’s 20th anniversary dinner like Chancellor Brown at the Mansion House dinners

• TN actively confuses the public e.g. on rail

 in opinion polls, a clear majority favours rail renationalisation  when Virgin’s franchise on the West Coast main line was threatened, more than 150,000 signed a pro Virgin on line petition including Jamie Oliver, Dick and Dom etc

The undisclosed (according to follow the money)

• All discourses work by focus/ shadowed by an undisclosed i.e.

foregrounding some events and relations while relegating others to the background; but TN = beyond what’s intellectually respectable

• In rail, the remorseless positive spin of TOCs’ TN (and the

negativities of the unions) occlude the three key questions which “follow the money” shows we need to answer before we have a sustainable rail network 1. How to deal with not enough money in the fare box i.e. determining the level of operating subsidy and investment 2. What to do about Network Rail’s wrecked balance sheet i.e. debt write offs to deal with legacy problems 3. What to do about the TOCs’ option on profits without investment or revenue risk i.e. the need to rethink franchising

Not enough money in the fare box

• Rail is £10 billn. short each year (£4billn of state cash subsidy and

£6 billn. of public borrowing to fund investment); fares pay for 65%

• f operating costs despite rising passenger numbers and fares; less

in low density regional sub systems e.g. Wales

• Long standing problem regardless of ownership: BR’s

integrated operations efficient with costs per mile 14-40% below Europeans but BR required subsidy (which didn’t cover cap ex on electrification and upgrades).

• After privatisation (as before) the British public expects more

services and cheaper travel than it is prepared to pay for at the ticket office; removing dividends wouldn’t solve problem

• Privatisation promised to bring in capital? an unprofitable sector

is not attractive to investors so rail remains levered on the state for cash funds and for guarantees

Average per year: £2,036m Average per year: £4,173m

The wrecking of Network Rail

• “Keep things going” accounting fix when quasi public Network

Rail replaced Rail track after 2004; subsidy shuffling via £5 billn

• pa. of operating subsidy plus public guarantees for £40 billn of NR’s

private bonds which fund cap ex (not in PSBR pre 2014).

• Railways levered on the tax payer covering operating subsidy

and guaranteeing billions of debt which NR will never repay

• NR has been wrecked just like a 1950s nationalised

corporation:  operating role is cheap inputs for the private sector; lower track access charges = hidden subsidy and apparent success for TOCs (TN claims). Government avoids walk away  legacy problems in the balance sheet (which currently has a bond mountain of £44 billion); huge burden of interest until government writes debt off in a statement on a wet Tuesday

Less subsidy for TOCs and more for Network Rail

Lowered track access charges as hidden subsidy

Network Rail now spending more on debt service than track maintenance

The TOC option on profits

• TOCs with franchises are taking profit without making

investment and/or risk on the revenue line; politically constructed profits in a loss making industry

• Big upside gain for winners e.g. Virgin has extracted net profit

£518mill and dividends of £499 mill ex WCML 1997-2012; surreally from a heavily subsidised operation whose direct net subsidy = £2.4

• bill. 1997-2004 and on a line upgraded at public cost of £9-10 billn
• Downside risk = capped for non winners (e.g. walk aways on

East Coast main line and Great Western after 2008 turn down)  no significant capital investment e.g. Arriva Trains Wales £5mill  SPV can pass dividends to parent but not liabilities  gaming the system with backloaded premium payments = take profit in early years and then decide whether to walk away (penalties low in relation to value previously extracted or premiums due in the last few years)

WCML: Virgin’s low-investment option on profits

Backloaded premium profiles: FWC 2012 vs 3 earlier walkaways

The outcome: sham capitalism

• TINA in the main stream worldview because alternatives require

analysis and rethinking beyond TN e.g. from Boris calibrating rates to land value tax to capture the unearned increment from transport improvement or e.g. not profits but fee for service for franchisees.

• The result is sham capitalism where railways are a Potemkin

village with a preservation order  privatised railways economically successful in TN but expensively levered on the tax payer  politically protected by civil servants + frontbenchers eg basck loading because it keeps the bids coming in  Part of a much larger and growing problem with structural reform outsourcing; the promise is efficiency through market plus competition vs the outcome is position seeking by special interests apparently unreformable through mainstream politics