Picture the scene in 2010. The sea wall at Dawlish in Devon has finally collapsed into the sea and the railway needs to be re-routed. The Brunel-built Tamar Bridge between Plymouth and Saltash has also been closed because of “structural problems”, cutting Cornwall off from the rest of the network. With other damage caused by storms, the total bill for reopening train services through the West Country is reckoned to be more than £500m.
The Prime Minister, Patricia Hewitt, knows that, ultimately, there is no choice. There may be few Labour constituencies west of Bristol, but you can’t have a whole section of the country cut off. “Why the hell did we allow that idiot Prescott to renationalise the railways?” Hewitt moans to Harriet Harman, her faithful deputy.
“Because it seemed a good plan at the time. The railways were in chaos,” Harman replies. “Well, it was a damn fool idea,” says Hewitt. “Not only did it cost us £6bn, but we get blamed every time the 8.02 from Surbiton is late. And now we are going to have to fork out all this money to keep the system going. Gordon is going to be furious and he’ll try to stop us giving the nurses that extra 1 per cent.”
Now picture the same scene today. The chief executive of Railtrack, a former bean counter called Steven Marshall, receives the same news from his Great Western zonal director, who says it’s going to cost £500m. “Well, we have a choice,” he tells his chief operating officer, Jonson Cox. “We could say that bringing back Cornwall is just too expensive, but we could be in breach of our operating licence. Or we do the work, but we have to slow down improvements on the East Coast Main Line. Or we go to the government and ask for a special grant.”
“We should do the last,” suggests Cox. “We could tell them that, without their help, Cornwall will be cut off for six months. That will bring us a few millions.”
That is the problem with the railways. A supposedly private industry remains dependent on Treasury decisions and subject to ministerial interference because it receives heavy subsidies.
So would renationalisation be a better solution? In one of his strangest political pronouncements before the 1997 election, Tony Blair promised to restore a “publicly owned, publicly accountable” railway but, when pressed, denied that this was a commitment to renationalise. It was no surprise that, once in office, Labour quickly abandoned any such notion and, instead, merely tinkered about with the structure by creating a Strategic Rail Authority to give the industry some direction.
But renationalisation is now talked about, not only among trade unionists and Labour backbenchers, but also in the broadsheet leader pages and at the dinner tables of the glitterati. The trouble is that the current problems stem not so much from privatisation as from fragmentation – and the fragmentation makes it all the harder to take the railways back into public ownership. British Rail was split into around a hundred parts, which were flogged off individually: they include Railtrack, the 25 train operators, the 14 renewal and maintenance companies, the three rolling-stock companies, the two freight operators, and companies covering numerous more marginal things such as catering and research. Harold Wilson once proposed to nationalise the top 100 companies: renationalising the railways would be almost as complicated. But the real argument concerns just three sections of the industry.
First, the train operators. Here, the window of opportunity for renationalisation lies with the franchising system. All the train operating companies’ existing franchises run out between 2003 and 2012. Rather than renewing the franchises, the government could award them to a reconstituted BR. Bob Crow, the number two at the rail union RMT, argues that the subsidy could be much reduced because there would then be no need to make profits. But this is not wholly true. If the franchises were taken back into public ownership, all the financial risks would be taken by the government. Under the present arrangements, if revenue dips suddenly, as has happened in the wake of the Hatfield disaster, private shareholders take a hit. In a renationalised railway, therefore, subsidy might have to increase.
Moreover, Sir Alastair Morton, chairman of the Strategic Rail Authority, is trying to relet the franchises early: he is offering 20- year terms in exchange for promises of investment from the operators. The potential for bringing in that investment would be lost were the franchises to become state-owned.
Second, Railtrack. The company’s place in the FTSE 100 is a bizarre anomaly, because its structure is unlike that of any other quoted company. Its income is fixed by a regulator, and there is very little potential for growth. Its profits depend on its being able to reduce expenditure; yet all its spending is on maintenance and renewal. It receives an annual £1bn in government subsidy. And it is the owner of a national asset that has been given a totally arbitrary value on which it is allowed to make an arbitrary rate of return.
The whole thing is a nonsense. But is renationalisation the answer? The company would have to be bought from its shareholders for £5bn-6bn (the current valuation suggested by the share price), three times the amount obtained for its sale. Renationalisation might be a good idea, but not at that price; and, in any case, the railway would then be dependent for future investment on the Treasury, which has a long track record of cutting capital spending whenever it has trouble balancing the books. An alternative is for future government subsidy to be given in return for shares, but that still leaves private shareholders in the driving seat, demanding a quick return on their money. The best solution must be to finance Railtrack at least partly through bonds – which offer a fixed rate of return – as has been suggested for the London Tube.
Third, the maintenance and renewal companies. These are all now part of large groups such as Balfour Beatty, Amey and Amec, and therefore virtually impossible to renationalise. But Railtrack’s dependence on them could be reduced. Whether inside or outside the public sector, Railtrack should have some in-house capacity to tackle maintenance; while it is dependent entirely on contractors, it cannot react quickly or flexibly to the kind of large-scale renewal job needed after Hatfield.
The other bits of BR that were privatised are largely irrelevant to the main argument. Even if Railtrack and the operating companies were returned to public ownership, the rolling-stock companies would probably stay in the private sector, building new trains and then leasing them to the operators, because that keeps the capital costs away from the government balance sheet.
Capital investment, indeed, is the nub of it all. The argument for the privatisation of the rail industry was always that it would attract investment. The record has, in fact, been patchy. The government has found that, in practice, it can only lever in the extra investment by increasing subsidy. The bleak truth of the rail industry is that the railways will never pay for themselves.
What is surely needed at this stage is an inquiry into the best future structure for the railways. So Morton’s hurried refranchising process should be stopped. He was supposed to reduce the number of operators in order to simplify the industry’s structure, but he has almost completely failed to do that. Instead, the mess that the Tories left behind looks like being set in stone for 20 years.
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