From Tony Lodge: Why new rail franchises must not become new railopolies

Tony Lodge is a Research Fellow at the Centre for Policy Studies and a Committee Member of the Conservative Transport Group.  His pamphlet, Rail's second chance - putting competition back on track is published by the CPS.  A short animation accompanying the pamphlet can be seen above.

The announcement of new rail franchising competitions this week is welcome.  But whilst providing a competitive bid process for the award of new franchises, it will be vitally important that the Government moves to guarantee that these franchises should face more on-rail competition to help keep fares down, boost passenger choice, boost passenger satisfaction and deliver more routes.

Twenty years after the Conservatives privatized the failing British Rail, there is now an opportunity to deliver a falling railway subsidy, cheaper railway fares and better services to more locations. But this will only become a reality if a level of on-rail service competition between franchises and what is known as ‘open access’ is delivered.

A key example is the present East Coast Main Line franchise holder 'East Coast' which competes with ‘open access’ rail companies Grand Central and First Hull Trains to Yorkshire and the North East.  However, there is no open access competition with Virgin which runs the West Coast Main Line franchise. New evidence shows that where on-rail competition exists, fares are lower, there is more revenue, more and happier passengers and higher premiums for the Government.

Preparing for privatization in 1992, the then Transport Secretary, John MacGregor wrote, “Our objective is to improve the quality of railway services by creating many new opportunities for private sector involvement.  This will mean more competition, greater efficiency and a wider choice of services more closely tailored to what customers want”.  An understanding of the need for a radical re-think for the railways can be explained by the post-war decline in rail use.

During the 1960s and 70s both political parties decided, based on clear evidence, that rail demand was doomed to decline, and moved to close a third of the railway network in the now famous ‘Beeching’ review.  This was nearly followed up with the Serpell Review in 1982 as demand for rail travel declined steadily from 1955 to 1982, and was again falling by the early 1990s.  

Consequently, it is important to contrast the challenges confronting the railways in the early 1990s, compared with today.  Faced with a gradual but clear passenger decline, the Government wanted to deliver private investment, more passenger choice and more competition. In parallel, it wanted to detach the politics of rail from Whitehall, as it had with other nationalized industries. Today, albeit twenty years late, the ambitions in John MacGregor’s words above are upheld in new research and official statistics; rail competition is finally delivering for passengers but on too small a scale.  The policy was and remains right, but it must now be more widely applied.

Whilst the Conservatives hoped and planned for the emergence of up to 100 rail companies, which would compete for business over one private infrastructure system, a situation has emerged in which fewer companies bid for franchises to operate rail services over a fixed long timescale.  The winner is the company seeking the lowest subsidy or offering the highest premium with other pledges of service and investment. Importantly, most franchise winners will not face any long distance non-franchised competition.  Critics complain, with some justification, that privatisation has allowed modern day passenger monopolies – or railopolies - to emerge.

In comparison, competition has been hugely successful for rail freight which was privatised alongside the passenger sector. It has benefitted from strong on-rail competition which has led to investment in new rolling stock, high levels of productivity and reduced costs to satisfy customer demand. So what about the passenger sector? Since 1993 the rail network has witnessed unprecedented growth. Passenger traffic has doubled with UK rail passenger numbers growing faster than all other European countries.   It is expected to double again by 2030.  The explosion in demand for rail in the last two decades has reversed all previous predictions.  More people are travelling by train than at any time since 1929 on a rail network half the size and enjoying the highest levels of safety on record.

Perhaps unsurprisingly to most ConservativeHome readers, new evidence now shows how long distance rail competition delivers lower fares, higher revenues and greater rail use without threatening the viability of the franchise holder; in this case on the East Coast Main Line.   It is a key development. New CPS research shows that those stations which enjoy long distance ‘open access’ on-rail competition with the franchise holder, such as Doncaster, York, Northallerton and Grantham, have seen (on average) passenger journeys increase by 42%, compared with 27% for those without competition, such as at Leeds.

Revenue has also increased at a faster rate (57% compared to 48%) where competition occurs but, crucially, there has been a much smaller increase in average fares at stations with competition, since 2009.  Importantly, at Edinburgh, where no on-rail competition exists to serve London, fares soared between 2009 and 2011. In the past, franchised rail operators have complained to Ministers that more competition will limit or prevent their ability to pay the Government the franchise premium as smaller competitors would ‘poach’ their business.  However, new statistics show that increased competition brings more passengers to the railway and the franchise holder. Take East Coast: it is easily able to pay its premiums, even though it must compete with Grand Central and Hull Trains at stations like Northallerton, York, Doncaster and Wakefield for London bound passengers.

The most recent official passenger satisfaction survey shows open access operators Grand Central and Hull Trains registering 96% and 95% overall passenger satisfaction respectively.  Importantly, they also scored top in value for money. A new Office for Rail Competition and Utilisation should be set up to deliver more rail competition and identify where capacity exists on the network for more open access to compete alongside franchises.  The present bodies tasked with doing this, the Office for Rail Regulation and Network Rail, have failed, and are a drag on more rail competition.

The Coalition has an opportunity to deliver a better railway out of the embers of last year’s franchise chaos.  It can now put right what was first intended twenty years ago.