Railways: a natural co-op sector?

Posted on October 2, 2011 · Posted in Co-operative News

“There is a remarkable paradox about the state of Britain’s railways today,” says Christian Wolmar in a new booklet, commissioned and published by Co-operatives UK*. “On the one hand, they are fantastically successful, attracting more passengers than at any time in their history and are the subject of a massive investment programme which has for the most survived the worst of the cuts.

“Yet, on the other, they are in a state of crisis, as they are sucking up record amounts of government money and are in the throes of various reviews whose outcome may lead to radical changes and a completely different structure.” At the heart of this paradox is the question of how to manage an industry that costs £5bn a year in subsidy to provide a service that is essential for both the country’s economic efficiency and as a more environmentally friendly method of transport than road.

Christian Wolmar, a leading transport commentator, told the News that co-ops offer a very attractive third way solution to this dilemma of public or private. He explains: “I suppose that’s because you can’t avoid the problem that the railways always need subsidy. The problem with a public service needing a subsidy is that private companies make profits out of that. That is unpopular with the public and with passengers.

“The co-op approach works from that point of view and also because this is a public service and if that is provided by people with a public service ethos at heart [as a co-op] they will do a better job than if you have a profit motive. The profit motive is out of place in the railways.”

Sir Roy McNulty is just completing his review of the structure of the rail industry in the UK and he, like all other observers, must be aware that the current botched system is the result of some terrible political decisions. Wolmar describes this structural legacy as the result of a manifesto commitment made by Sir John Major in 1992 when fighting a General Election that he never expected to win. As a result, the rail privatization commitment was not properly thought through.

The new structure was imposed by the Treasury, which was more concerned about a theoretical ideological construct of ‘generating competition’ than having a working transport system. The Treasury’s preference won despite opposition from both Major and the Department of Transport. The result was a split between operating companies and infrastructure owner – the latter being the doomed Railtrack PLC. And despite having a structure that was intended to generate income for the Government, the reality is that the subsidy is now twice the level ever paid to British Rail as a nationalized business.

Since then, there has been a sequence of changes to the structure of the rail industry. Serious accidents at Southall in 1997, Ladbroke Grove in 1999, Hatfield in 2000 and

Potters Bar in 2002 have all been blamed on the way that privatization was introduced, with insufficient safeguards on safety. This led to Railtrack being forcibly closed down by the Government and replaced by the not-for-profit Network Rail. But the structure of Network Rail was itself inadequate, allowing excessive bonuses for senior executives and providing inadequate control over its contractors and the cost of contracts.

The system for awarding and monitoring rail operating franchises has also proved inadequate. The number of franchises has gradually reduced from 25 to 19, with one franchise at present being operated by the Government itself. The result of the systemic mismanagement is that despite a huge reduction in passenger numbers that should have led to a reduction in unit costs, the reality is that costs per passenger kilometre are 40% higher than at privatization.

At the same time, the franchise operators are gaining large profits – train operators

make around £250m profit per year. With the franchises being granted for relatively short periods, operating companies are profit-taking, with little reinvestment. Wolmar quotes Gordon Brown’s senior adviser, Lady Shriti Vadera describing the companies as “thinly-capitalised equity profiteers of the worst kind”.

If we accept the premise that co-operatives should take a role in the restructuring of the industry, there are several options for how this might be achieved. One attractive possibility in terms of improving efficiencies and operating effectiveness would be for the infrastructure company (currently Network Rail) to be jointly owned by the rail operating companies. That would, though, do little to improve the ethos of the rail operating companies, nor would it address passenger unhappiness over the profits earned by subsidy-receiving PLCs and the often poor service that passengers receive.

Alternatives would include Network Rail becoming either employee-owned, or using a co-operative structure that included representation from passengers and other interest groups. It might also be possible to award what Wolmar calls ‘microfranchises’ to small co-ops to run individual stations, station services, or local rail routes. (“Small franchises work well in Germany, Sweden and Denmark,” reports Wolmar.)

This idea would enable Go Co-op to make progress on its proposal to run trains between Westbury and Birmingham, using new rolling stock. Wolmar explains that Go Co-op continues to advance with its plans, and is in negotiation with Network Rail and the Office for Rail Regulation over access rights, and with a Chinese company over leasing the trains.

But, Christian warns, existing franchise requirements for routes make it very difficult for any local co-op structure to win an operating franchise. An operator proposing a new service under open access arrangements must still prove that it has sufficient financial backing to cover first year losses – about £3m in the case of Go Co-op. But without access arrangements approved, a potential operator cannot plan a precise service proposal and therefore cannot raise funds. Go Co-op director Alex Lawrie complained to Wolmar: “The rules are clearly drawn up with existing operators in mind, rather than new entrants.”

While there are major barriers to developing co-operative engagement in the rail sector, there is potentially strong passenger support for the idea. Alongside Christian’s own research, Co-ops UK has published the results of a survey of passenger opinions. This found that almost three quarters of regular rail users would like to have a greater say in the way their service is run; almost two thirds of UK adults believe that passengers should have an ownership stake in rail companies; over half believe that ticket prices would fall if services were co-operatively owned by passengers; and almost two thirds believe that services would improve if rail services were provided by a co-op.

The research even found that regular passengers would be willing to invest in their rail company: regular commuters would put £840 into a train operating co-op. As Christian points out, the experience of Welsh water company Glas Cymru demonstrates that a mutually-structured utility business can operate successfully and raise substantial funds for investment.

This leaves the question of whether there is political support for such a ‘radical’ change of approach. Lord Andrew Adonis was transport minister in the Labour Government until the last General Election, and now heads the influential think-tank the Institute for Government. Encouragingly he has contributed the foreword to Christian’s report.

Adonis writes that experience has shown that neither the existing privatized structure nor wholesale renationalization provides a suitable structure for the rail industry going forward. “Pragmatically we need a blend of both competition and co-operation for our railways to succeed,” he says. “The co-operative model challenges us to think beyond

the old paradigms of the market versus the state; beyond the divisions between owners and customers; and to think creatively about new ownership and management models. This is exactly the kind of creative thinking our railways, and more generally, our public services will need in the years ahead.”

  • ‘Co-operative Rail: a radical solution’ is written by Christian Wolmar, published by Co-operatives UK and can be downloaded free at www.uk.coop/rail