December 5, 2020

Y M L P-298

It Must Be Business

Billions of taxpayer cash to prop up the rail network until at least 2022 as franchising system axed

10 min read

The taxpayer is set to be landed with a bill of more than £3.5billion to prop up the rail network until 2022 to keep loss making services running, it emerged today.

The Department for Transport (DfT) has announced rail franchising has been ‘ended’ by extending measures introduced to keep trains running after the coronavirus outbreak. 

‘Transitional contracts’ signed at the start of the pandemic to keep trains running will be extended for another 18 months.

During this time, ministers will overhaul the way trains are run and create a ‘simpler and more effective structure’.

This multi-billion pound investment means the taxpayer will take on private operators’ revenue and cost risks. 

The DfT has taken on franchise holders’ revenue and cost risks since March, at a cost to taxpayers of at least £3.5 billion.

Transport Secretary Grant Shapps said the pandemic has proven that the privatisation model, introduced 25 years ago, is no longer working

‘Significant taxpayer support will still be needed’ under the new Emergency Recovery Management Agreements (ERMAs), the DfT said.

It went on: ‘Ministers today ended rail franchising after 24 years as the first step in bringing Britain’s fragmented network back together.’

BIllions have already been spent to maintain the railway network since March after passenger numbers plummeted to a fraction of pre-pandemic levels.

This drop made it financially impossible for private companies to run services.  

Under the new measures, rail firms will continue to be paid a management fee for running services.

But under the ERMAs it will be a maximum of up to 1.5% of the franchise cost base, rather than 2% under the Emergency Measures Agreements introduced in March.

Most train services in Britain have operated as franchises since the railways were privatised around 25 years ago. 

Announcing the move, a statement from the Department of Transport said: 'Ministers today ended rail franchising after 24 years as the first step in bringing Britain's fragmented network back together'

Announcing the move, a statement from the Department of Transport said: ‘Ministers today ended rail franchising after 24 years as the first step in bringing Britain’s fragmented network back together’

The announcement comes after the Tories pledged in January to reopen a series of closed railway lines in the North of England, including many which were axed in the controversial Beeching closures of the early 1960s.

The £500million initiative was set to breathe life back into communities cut off by Dr Richard Beeching, then the chairman of the British Railways Board, who closed more than 4,000 miles of the network in an efficiency drive.

Transport Secretary Grant Shapps said today: ‘The model of privatisation adopted 25 years ago has seen significant rises in passenger numbers, but this pandemic has proven that it is no longer working.

‘Our new deal for rail demands more for passengers. It will simplify people’s journeys, ending the uncertainty and confusion about whether you are using the right ticket or the right train company. 

Operators have been moved to 'transitional contracts' ahead of the creation of a 'simpler and more effective structure' which will be developed over the coming months

Operators have been moved to ‘transitional contracts’ ahead of the creation of a ‘simpler and more effective structure’ which will be developed over the coming months 

Ministers are accused of ‘failing to act decisively’ over future of rail services

Tan Dhesi, Labour’s shadow rail minister said it was ‘completely unacceptable’ that taxpayers will continue to pay ‘hundreds of millions of pounds’ in management fees to private companies.

He added: ‘These agreements paper over the cracks of a broken rail system.’

Unite national officer for rail Harish Patel accused ministers of ‘failing to act decisively’ by allowing firms to ‘continue to profit by receiving huge amounts of taxpayers’ money’.

He said: ‘Instead of the proposed new model which will allow privateers a renewed opportunity to feed off the taxpayer and passengers, the Government should be permanently renationalising rail services to increase services, improve punctuality and reduce tickets prices.’

Rail, Maritime and Transport union general secretary Mick Cash urged the Government to ‘ditch its obsession with the free market and call to a halt any attempts to reanimate the corpse of rail privatisation’.

Transport Salaried Staffs’ Association general secretary Manuel Cortes said: ‘Sadly, it looks like the Government is once again kicking into the long grass what to do with our railways, and instead of grasping the nettle is opting for transitional measures which prop up the status quo.’

‘Our new deal for rail demands more for passengers. It will simplify people’s journeys, ending the uncertainty and confusion about whether you are using the right ticket or the right train company.

‘It will keep the best elements of the private sector, including competition and investment, that have helped to drive growth – but deliver strategic direction, leadership and accountability.

‘Passengers will have reliable, safe services on a network totally built around them. It is time to get Britain back on track.’

But the move has been criticised by many, with some slamming the ‘simply unacceptable’ cost to the taxpayer.

Tan Dhesi, Labour’s shadow rail minister, said: ‘We welcome the Government admitting privatisation hasn’t worked and bringing in greater public sector involvement in managing the railways.

‘But today’s agreements mean taxpayers are set to continue paying hundreds of millions of pounds in profit to private rail companies to run the network. 

‘This is completely unacceptable.

‘These agreements paper over the cracks of a broken rail system. 

‘It’s time to put passengers before profit and bring our rail franchises back into full public ownership.’

Unite union national officer for rail Harish Patel added: ‘Rail franchising has been broken beyond repair for years but the Covid-19 pandemic has finally forced the Government to accept the inevitable.

‘However, yet again the Government is failing to act decisively, allowing private providers to continue to profit by receiving huge amounts of taxpayers’ money. This is simply unacceptable.

‘Instead of the proposed new model which will allow privateers a renewed opportunity to feed off the taxpayer and passengers, the Government should be permanently re-nationalising rail services to increase services, improve punctuality and reduce tickets prices.’ 

While promising 'reliable, safe services', Transport Secretary Shapps said: 'It is time to get Britain back on track'

While promising ‘reliable, safe services’, Transport Secretary Shapps said: ‘It is time to get Britain back on track’ 

The DfT described the announcement as ‘the prelude’ to a White Paper which will respond to the recommendations of Royal Mail chairman Keith Williams, who was commissioned by the Government to carry out a review of the railways. 

Mr Williams said: ‘These new agreements represent the end of the complicated franchising system, demand more from the expertise and skills of the private sector, and ensure passengers return to a more punctual and co-ordinated railway.

Beeching’s axe: The loss of 4,500 miles of British railway

British Rail was losing £140m a year when Dr Richard Beeching took over as chairman of the British Transport Commission.

His solution, announced on 27 March 1963, was to ‘make railways pay’.

Dr Beeching wrote two reports proposing cuts to British Railway services.

The first was entitled The Reshaping of British Railways and published in 1963. It was based on a survey carried out over one week in April 1961.

A third of the route surveyed carried only one per cent of passenger and freight traffic.

The second report in 1965 was called The Development of the Major Railway Trunk Routes.

The first report suggested that 2,363 stations and 5,000 miles of railway line should be closed – accounting for 55 per cent of stations and 30 per cent of route miles.

The Conservative government welcomed the report, but British people living in rural areas were against the plans.

Following the reports 2,128 stations and more than 67,000 British Rail jobs were cut. More than 4,500 miles of track was lost.

Closures stopped in the early 1970s and nearly 30 stretches of railway have since been reopened, including the line between London and Swanage in Dorset.

 

‘I am ensuring the recommendations I propose are fit for a post-Covid world, but these contracts kick-start a process of reform that will ensure our railways are entirely focused on the passenger, with a simpler, more effective system that works in their best interest.’

Matthew Gregory, chief executive of FirstGroup, which owns four franchises, said the ERMAs could lead to ‘a more appropriate balance of risk and reward for all parties’.

He added: ‘We have long advocated for a more sustainable long-term approach to the railway, with passengers at its centre, and we look forward to working constructively with the DfT to make this a reality.’

But Rail, Maritime and Transport union general secretary Mick Cash claimed ‘private rail companies are a waste of time and a waste of money’.

He insisted that ‘public ownership is the only model that works’.

Anthony Smith, chief executive of watchdog Transport Focus, said: ‘Passengers will be reassured to hear that there is an agreement to keep the trains running for the foreseeable future.

‘A stable, reliable railway is key to getting Britain moving again and helping rebuild the economy.

‘The industry must continue to focus on maintaining rigorous cleaning regimes and good performance so that existing and returning passengers can travel with confidence.

‘We know that lockdown has radically changed people’s travel patterns. Government and train companies must now also work together to offer what passengers are keen to see and provide tickets that fit the way we live and travel now such as flexible season tickets and better value-for-money fares across the board.’

Darren Shirley, chief executive of pressure group Campaign For Better Transport, said: ‘We welcome the Government’s ongoing support for rail passengers and the decision to replace the franchising system.

‘The future of the railway now depends on the creation of a new system that is centred around passengers, delivers social, economic and environmental benefits, and gives more devolution to regional and local governments with competition in the right places.

‘Delivering a reliable and affordable rail network that works for both commuters and leisure passengers is crucial to helping rebuild the economy and protecting the environment as part of a green transport-led recovery and today’s announcement is a step in the right direction.’

FirstGroup chief executive Matthew Gregory said: ‘The Government has extended its funding of the rail industry whilst demand for services remains heavily affected by coronavirus, and we are pleased that the vital nature of rail services to communities and local economies is being recognised.’

He went on: ‘We have long advocated for a more sustainable long-term approach to the railway, with passengers at its centre, and we look forward to working constructively with the DfT (Department for Transport) to make this a reality.’

Paul Plummer, chief executive of industry body the Rail Delivery Group, said: ‘A renewed and reinvigorated partnership between the public and private sectors will be the best way to improve services and help regrow the market for train travel which is good for economic recovery and the public finances.

‘Combined with the measures the industry is taking to keep trains clean, this announcement means people can continue to travel with confidence.’

Transport Salaried Staffs’ Association general secretary Manuel Cortes said: ‘Sadly, it looks like the Government is once again kicking into the long grass what to do with our railways, and instead of grasping the nettle is opting for transitional measures which prop up the status quo.’ 

What is happening and how it will affect rail passengers?

How did rail franchising work?

Since Britain’s railways were privatised in the mid-1990s, the Government decided the levels of service and performance it wanted for most routes over a set number of years.

Private companies bid for the right to operate the franchises, with the Government selecting the winning candidates.

What was wrong with the system?

There were complaints about rising fares and poor punctuality for many years, but the chaotic introduction of new timetables in May 2018 led the Government to accept that major reforms were required.

What impact did the coronavirus pandemic have?

The collapse in demand caused by the virus forced the Government to take on franchise holders’ revenue and cost risks.

Operators continued to run services, being paid a management fee of up to 2% of the franchise cost base.

Those Emergency Measures Agreements (EMAs) lasted six months and expired on Sunday.

What is the new system?

The Department for Transport (DfT) announced on Monday it has replaced EMAs with Emergency Recovery Management Agreements (ERMAs).

They are similar in operation, but the maximum management fee paid to private firms has been reduced.

Why is the announcement significant?

Although ERMAs represent a continuation of emergency funding arrangements, the DfT said they demonstrate that rail franchising has “ended”, describing them as “transitional contracts to prepare the ground for the new railway”. 

Who will run trains under the new system?

Franchise holders will continue to run services.

Trade unions want the operation of all train services to be brought back into the public sector, as has happened with Northern Trains and London North Eastern Railway.

But the Government has given no indication it wants to take on control of more services.

What happens next?

The DfT will attempt to reach an agreement with franchise holders by mid-December over what payments would be required to terminate their contracts.

If a deal is reached, officials intend to negotiate a direct award contract – without a bidding process – for running services once ERMAs expire in six to 18 months.

But if no agreement is possible on a franchise, the DfT has the right to end emergency measures early, meaning the operator will take back its pre-pandemic financial responsibilities from mid-January 2021. 

Will the new system be an improvement?

The DfT said it will improve co-ordination between operators and reduce “excessive capital costs”.

Transport Secretary Grant Shapps stated it will “keep the best elements of the private sector” such as competition and investment, but will “deliver strategic direction, leadership and accountability”.

What is the response of the rail industry?

FirstGroup chief executive Matthew Gregory said it is looking forward to working with ministers to develop a “more sustainable long-term approach to the railway”. 

How about the unions?

Unite claimed the new model will “allow privateers a renewed opportunity to feed off the taxpayer and passengers”.

The Rail, Maritime and Transport union claimed “public ownership is the only model that works”.

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