profits and losses
Does the railway industry actually make a profit? If so, why do we hear of considerable public subsidies going to the industry every year?
But if there are no profits, how do the private sector companies which play various parts (particularly by operating passenger trains) survive?
The answer is that a complex financial merry-go-round has evolved since railway privatisation was first envisaged by the Government in 1992.
A complex financial merry-go-round has evolved since railway privatisation was first envisaged.
Various lists have been published over the years which supposedly explain operators’ profits. One of these appeared as Annex B to the House of Commons Transport Committee ‘Rail 2020’ report on 4 January 2013. This included a table entitled ‘Train operator profits’. It reported that in 2011-12 no fewer than nine franchised operators were paying premiums to the Government. So were nine franchises profitable? Not quite.
First of all, that question is too vague. We need to ask: profitable for whom? We may take it that all the franchises were profitable for their owners, unless something exceptional was happening, and few franchise owning groups (who usually possess the individual franchises) could tolerate losses for very long. So were these nine profitable for the Government, then? After all, some had paid hundreds of millions in premiums (South West Trains had paid the most that year – £228.6m). Time for taxpayers to celebrate? Sadly, no.
What that table omitted was each operator’s share of Network Rail’s costs. NR receives a Direct Grant each year (roundly £4bn) from the DfT. Operators have to pay NR to use its track and stations, and these payments are known as ’access charges’. The original plan when the railways were privatised was that these charges would be levied at a true market rate.
However, since the ending of private-sector Railtrack in 2002, these charges have been artificially depressed, as far as the operators are concerned, and the balance goes directly from the Government to Network Rail. This means that fewer operators need subsidy, because they are not paying the true costs of their presence on Network Rail’s tracks.
The main result, then, is that more operators are paying the DfT because the DfT is meeting a large part of their bills for them behind the scenes.
If track access charges went up to their ‘real level’ how many operators would still be able to pay premiums? Answer: almost none, although South West Trains would be one of the exceptions. But even SWT’s premiums would be much lower.
In 2014-15, SWT paid gross premiums to the DfT of £551.8m. But you must subtract revenue support of £177.6m (paid to SWT by the DfT) and SWT’s share of Network Rail's direct grant – another £242.7m. Just £131.6m was left as the ‘real’ premium. Only two other franchises were in the same position (and their ‘real’ premiums were both below £10m). With no direct grant to Network Rail, all the others would have needed subsidy.
On average, every passenger kilometre in 2014-15 was subsidised by 3.48p, when Network Rail's direct grant is taken into account.
[Source: DfT: rail subsidy indicator 2014-15.]