How franchising scams the taxpayer for billions

Action for Rail has warned that rail franchising is fundamentally flawed and unsustainable after it was revealed that train operating companies (TOCs) made a £2.7bn net gain from taxpayers last year.

 Analysis of official figures shows that in return for paying £1.17bn in premium costs to run services companies received total public subsidies of £3.88bn.

 The figures, published this week by the Department of Transport, come as the government prepare to make an announcement on the future of the West Coast Mainline currently operated by Virgin.

 Virgin last year made a £133m net gain from taxpayers’ subsidies which helped the company achieve pre-tax profits of nearly £40m, of which £29m went to shareholders.

 The research shows that the taxpayer subsidy given to Virgin is seven times higher than that awarded to state-run East Coast Mainline, which last month reported operating profits of £7.1m that will be re-invested back into the service.

The figures show that 15 out of the 16 TOCs that figures were available for were net recipients of taxpayer subsidy, as the following table shows:

Train Operating Company Total public subsidy (£millions) Total franchise payments  (£millions) Total net public subsidy (£millions) Net franchise payment (pence per passenger mile) Revenue Support (pence per passenger mile) Network Grant (pence per passenger mile) Total net subsidy (pence per passenger mile) Total passenger miles (millions)
c2c 43 12 31 -2 0 7 5 618
Chiltern Railways 84 -6 90 1 0 12.4 13.5 626
CrossCountry 317 12 305 -0.6 0.9 14.7 15 2033
East Coast 202 190 12 -6.2 0 6.6 0.5 3058
East Midlands Trains 214 66 148 -4.8 1.9 13.7 10.8 1372
First Capital Connect 149 197 -48 -9.1 1.5 5.4 -2.2 2160
First Great Western 533 321 212 -8.8 5.8 8.8 5.8 3650
First TransPennine Express 198 -79 277 8 0 12.1 20.1 985
Greater Anglia 33 17 16 -4.2 0 8.1 3.9 409
London Midland 205 -65 270 5 0 10.7 15.8 1307
National Express East Anglia 220 112 108 -5.3 1.8 8.6 5.1 2113
Northern Rail 465 -109 574 8.2 -0.9 27.6 34.9 1333
Southeastern 338 -39 377 1.5 1.9 9.7 13 2581
Southern 192 16 176 -0.6 0 7 6.4 2747
South West Trains 350 315 35 -8.8 2.4 7.4 0.9 3575
Virgin Trains 344 211 133 -5.7 1.2 8.1 3.6 3702
Total  3888 1171 2717 -32.4 16.5 167.9 152.1 32268 

The above table shows total subsidy figures for each Train Operating Company. This is then broken down by franchise payment, revenue support and Network Grant.  Network Grant per TOC represents the indirect funding provided through Network Rail’s subsidised track access charges for each TOC. Total passenger mileage is taken from the ORR data and a total subsidy is calculated from this.

Many TOCs receive direct subsidy either through the terms of their franchise agreement or through additional ‘revenue support’.  Revenue support is money provided by the government to shore up revenue for TOCs that have failed to meet the expected numbers as part of their franchise agreement, under what has been termed ‘cap and collar’ arrangements, the quid pro quo being that any excess profit is shared with the government. 

(As an aside, cap and collar is on the way out under future franchises but a very much more complicated version of the same ‘risk share’ will be replacing it, the principle remains),

However, what is key to understanding the true nature of public subsidy is that all TOCs benefit from an indirect subsidy, the Network Grant, paid through the government’s funding of Network Rail.  This funding enables Network Rail to charge very low access charges to TOCs using their tracks.  Given that track access is one of the key components of TOC running costs, the fact that those charges are heavily subsidised by the government means that this is, in effect, another taxpayer hand out to the train companies.

So we can see from the table that although Virgin Trains are right when they say they pay a heafty premium payment as part of their franchise, around 5.7p per passenger mile, they get back not only 1.2p in ‘revenue support’ but another 8.8p per passenger mile in Network Grant.  This gives them a net subsidy of 3.6p per passenger mile, a net gain over the year of around £133m. 

To explain this a bit more clearly, here’s what Professor John Stittle, Senior Lecturer in Accounting at the University of Essex said in the Rebuilding Rail report:

“Four of five years ago they changed the centre of government grants, so instead of many subsidies going to the TOCs they gave a massive great slice to Network Rail. In return NR cut the track access charges. So now Virgin is paying far less in track access charges for West Coast Main Line. Hence, it is now paying a premium. And it’s all because of the allocation of where government funds go.

If you’re trying to show that the private sector TOCs are viable entities then you don’t want them receiving subsidies – it’s much better if they are paying premiums. So rather than give them government funds, give the funds to Network Rail. That is what is happening. As a result TOCS such as Virgin can more easily extract considerable funds from the rail industry in the form of dividends – which otherwise couild have been reinvested in the industry”

Given how this system operates, it makes a bit of mockery of the franchising process.  When we hear First Group and Virgin battling over bonds and premium payments, we should remind ourselves that this is the recycling of current and future taxpayer handouts.

Action for Rail Chair and TUC General Secretary Designate Frances O’Grady said:

“These figures show the true nature of our privatised railways – a system of corporate welfare where train operators make a play of bidding for contracts knowing that their future revenue is underwritten by the taxpayer.

 “The franchising process is fundamentally flawed and unsustainable. Ministers must learn from the East Coast Mainline which has shown that public operated railways can be more efficient and deliver better value for money.

 “Instead of allowing public subsidies to end up in the pockets of shareholders the government should be using this money to invest in services that puts passengers first.”