Friday 23 October 2020

 

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rail unveiled

::: More cash for trams and light rail in England








why don’t the railways make a profit?







Passenger railways in Britain are subsidised. But although passenger figures have returned to levels last recorded in the 1920s, when the railway companies were paying dividends, these days the taxpayer still has to help out.

What has changed?






What has changed since the 1920s?



There are several reasons why passenger railways do not make a profit – at least in the sense of providing a reasonable return on the capital invested in them – and they probably never have.

In many ways, freight is much easier to handle than passengers, and less expensive to carry. (Passenger rolling stock is much more elaborate, and punctual working becomes a priority: freight does not complain if it is held up for an hour or two en route.)

It is possible that busy express trains were also profitable (the lines they used had to exist anyway, so that freight could be moved), but the business case for local and regional passenger trains was much more doubtful.

So private sector railway companies could flourish in the 19th century mainly because of their revenues from the carriage of goods, on which they had a virtual monopoly.

This caused concern to government, and some elements of financial regulation emerged as early as 1844. By the 1880s railway freight charges were being tightly controlled.

Even so, healthy freight traffic kept railway balance sheets in the black until after the First World War, when it quickly became clear that the companies did not have the resources to repair their war-worn network.

As a result, nearly all were ‘grouped’ into four super-companies in 1923, amid hopes that the economies of scale would rescue them.

Growing competition



This might have happened if the world had otherwise stayed the same, but the number of cars (and, more importantly, lorries) started to grow quickly in the 1920s. New motor buses in country areas also sapped local passenger traffic.

A major world recession following the Wall Street crash proved to be the last straw. Even core railfreight traffic (coal and steel) fell back. The companies started to receive government grants towards capital projects as early as 1929. The decline in freight hit the LNER particularly hard, and its ordinary shareholders rarely received a dividend.

The companies’ main complaint in the 1930s was that they were still being tightly regulated, while their motorised competitors had an almost free hand. A road haulage company could charge ‘what the traffic would bear’, and it could decline loads which were not worth having: the railways had no such freedoms.

There might have been some reforms (they were on their way by 1939) but another World War interrupted the process, and the railways were conscripted (although not nationalised) to support the war effort.

When peace returned in 1945, the railway companies were in much the same position as they had been at the end of World War I in 1918 – worn out, with huge arrears of maintenance. Much of the extra income they had gained from carrying swollen wartime traffic had been siphoned off by the government.

This time the answer to the railway problem was thought to be state ownership.

Nationalisation



Unfortunately, the 1947 Transport Act was poorly drafted. Railway shareholders had only received dividends if their company could afford them, but nationalisation offered them interest-bearing stock in exchange (there was no point in keeping the old shares).

The railways were now managed by a subsidiary of the new British Transport Commission – the Railway Executive. The railways remained in profit for a few years, but the BTC’s legal obligation to pay fixed interest on its stock dragged it into deficit from the beginning. In other words, had there been no nationalisation, dividends would probably not have been so high.

The BTC had also taken over most road haulage (which was also profitable), but a further Transport Act in 1953 reprivatised the lorries (and incidentally abolished the Railway Executive).

Freshly unleashed private sector road competition was more than the fragile economics of the railways could stand, and British Railways went into apparently irreversible deficit in the mid-1950s.

Freight was still the majority earner until 1970, but after that passenger revenues were greater.

Privatisation



Freight traffic continued to fall, but it has been recovering somewhat in recent times. However, the modern structure, introduced from 1992, divorces the freight and passenger operators more or less completely. It is likely that the passenger railway always received silent cross-subsidy from freight, even in the ‘golden years’ before World War I, but that source of support no longer exists.

One possible indicator in relatively modern times was provided by the Serpell Report of 1982, which concluded that only a very small network (essentially, just a few main lines) could be profitable – but then only thanks to the contribution made by freight.

(It is true that British Rail claimed that its InterCity division had moved into profit in the 1980s, but this was probably achieved by a judicious allocation of flows and costs. When private sector franchises took over in 1996-97 all but one, Gatwick Express, needed subsidy from the outset.)









are the railways really privatised?
more about profit
profits and losses
railfreight operators
why are railways privatised?







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