Labour peer and former transport secretary Andrew Adonis, who renationalised the East Coast Main Line in 2009. Photograph: Getty Images.
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Andrew Adonis: East Coast Main Line could still be saved from privatisation

Former transport secretary says that the "chronic incompetence" of the government means "there’s a very good chance that the contract won’t be let by the election".

When Labour renationalised the East Coast Main Line in November 2009, it did so out of necessity rather than conviction. The private holder of the franchise, National Express, had defaulted on the £1.4bn contract agreed with the government just two years earlier and the then transport secretary, Andrew Adonis, was “not prepared to bail out companies that are unable to meet their commitments”. Adonis, who was nicknamed “the thin controller” by the industry, suggested that the franchise would be “re-let again to a new private operator” by mid-2011.

Three years later, the coalition government is in the process of doing just that but Labour’s voice is raised in protest. East Coast, the publicly owned train operating company established by ministers as an operator of last resort, has proved more successful than almost anyone anticipated. It has cut journey times, carried more than a million extra passengers and achieved the highest customer satisfaction of any rail company. Free of the need to pay dividends to private shareholders, it has also returned £640m to the Treasury to reinvest in the service. In 2012, Virgin Trains received seven times as much in taxpayer subsidy to run the West Coast Main Line.

“There’s a great esprit de corps among management and staff,” Adonis told me when I asked him to explain East Coast’s remarkable performance. “They haven’t had to work to an impossible business plan, which was the big problem with National Express before. All of those factors have contributed to good performance and a strong, self-confident public company.” The Conservatives’ desire to reprivatise the line was, he suggested, based on pure ideology. “They don’t like the concept of a successful state company and they’re keen to kill this idea before it gains traction and might gain other franchises. The other private-sector companies are also very anxious that East Coast is abolished before the election, so that it provides  less competition to them for future franchises.”

But with the government aiming to complete the privatisation by February 2015, Adonis, who is now Labour’s shadow infrastructure minister and is leading the party’s growth review, warned that ministers are short of time.

They’ve got literally only a few weeks of leeway, and given the chronic incompetence of the Department for Transport in letting recent contracts, I think there’s a very good chance that the contract won’t be let by the election. And if East Coast continues to exist as a company at the election then I’m sure Labour would want to keep it in operation as a state company.

Some in Labour have suggested the party could incrementally renationalise  the railways by taking franchises back into public ownership as they come up for renewal (an option supported by 66 per cent of the public according to a YouGov poll last November, with just 23 per cent opposed). “I don’t use the language of renationalisation but of fair competition,” Adonis told me. “My view is that the performance of East Coast as a state company is sufficiently strong that it would stand a good chance of being able to win future franchises on a fair basis. And, of course, because it doesn’t have to pay dividends, it has a substantial financial advantage.”

He concluded: "I would say at the moment, given the catastrophic performance of the government in handling the West Coast franchise, and the fact that the lawyers will be deeply nervous about legal challenges to the franchising process next time round, I think there’s a very good chance that East Coast will still be a public company by the time of the election."

The irony is that a government ostensibly committed to competition is, in this instance, determined  to quash it. But even the Tories’ aversion to public ownership has its limits: one of the three approved bidders is the foreign firm Keolis: 56.7 per cent owned by the French state.

ClarificationVirgin Trains has asked us to clarify that it received no net subsidy for running the West Coast Main Line in 2012 and paid a premium of £168m to the Treasury. The figures cited in the piece, 'seven times as much in taxpayer subsidy to run the West Coast Main Line', referred to the net subsidy paid to Network Rail for maintenance of the rail infrastructure minus the premium generated by Virgin Trains.

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Now listen to George discuss the possibility of renationlising the railways on the NS podcast:

George Eaton is political editor of the New Statesman.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation