Why calls to keep the East Coast rail franchise in the public sector are folly

logo_eastcoast_3The East Coast rail franchise has been successfully run by the UK state organisation, Publicly Operated Railways (POR), since it was abandoned by National Express in 2009 when it failed to meet its financial targets.

East Coast will return to the private sector in April 2015 after a protracted bidding process was finally won by the joint Stagecoach/Virgin venture (90/10 shares respectively). The Department of Transport somehow avoided awarding the franchise to the French state railway bid (Keolis and Eurostar joint venture).

The anti-privatisation debate has been championed by the Labour party and is logical. DoR has made healthy returns to the Treasury, why hand these to a private company when the public sector has done so well? At the very least, why could DoR not bid to run the franchise?

The Conservative government’s response, essentially, is that anything that the public sector can do, the private sector can do better. Notwithstanding the fact that often they cannot as two of the franchisees for this route – GNER and National Express – have failed. However, the Stagecoach/Virgin alliance has worked on the West Coast route and Stagecoach has been running the London commuter franchise, South West Trains since privatisation in 1996. But ultimately, the Conservative government has an ideological fixation with the private sector. Many of its members have positions in private sector firms that benefit from government contracts.

For me, however, keeping individual franchises in the public sector is a red herring. These are companiesNetwork_Rail_imagesCA0ADM11 that have no assets. Whilst they are the main channel for passengers to access railway services, they are far from being the railway. The assets of the railway are arguably where the value is. Now, fortunately, the key assets – the permanent way, signalling, stations, etc. – are public sector assets after the demise of Railtrack in 2002. But these assets do not generate surpluses. Quite the contrary. Despite announcing a pre-tax profit for 2014 of £1.035bn, the cumulative debt amounts to £20bn.

Class171By contrast, the owners of the rolling stock make a killing out of leasing trains to franchisees. There are three major players whose profit margins after tax seem to be around 10 per cent, according to a Channel 4 News investigation. Whilst there may well be some shrewd investment and management involved, ownership of these firms lacks transparency (two have registrations in Jersey and Luxembourg). Moreover, these businesses were sold at privatisation for a song. Porterbrook Leasing, for example, was sold in November 1995 for £527m. It was resold in July 1996 to Stagecoach for £825m. In essence, it costs a lot of money to lease trains to generate high profits for the leasing companies.

My argument, then, is this. The railway is only meaningful when it is an integrated whole in terms of its ownership and operation. Keeping franchises in the public sector when the real money is made by those with whom they must contract in order to provide train services; namely, rolling stock leasing companies, is to miss the point. It gets the Labour Party off the hook. But it is not public provision of public services.

Picture: Class 171 Mackensen

Advertisements

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: