Stuart Cole examines the options facing the Welsh Government when it considers the future ownership and control of our railway networkAugust 2nd, 2012
Six years may seem a long time before the renewal of the Wales and Borders rail franchise takes place, but the key investment and contractual decisions will have to be made long before that, in 2015. So the Welsh Government should already be considering its options.
There are broadly four options in terms of running Wales’ railways. Three of them involve continuing with a franchise arrangement along present lines, with varying degrees of radical adjustment. The most far-reaching option would be to set up the Welsh rail operation as a co-operative owned by the employees or the passengers or a combination of the two. This would have many advantages, and would certainly place Wales on the world stage in railway terms, though it would undoubtedly be difficult for the Welsh Government to persuade the Department of Transport in London to go down this route.
Under present arrangements the new franchise in 2018 will be awarded by the Department for Transport with input from the Welsh Government as co-signatory. The Welsh Government became responsible for the funding and performance of Arriva Trains Wales in 2006 following a budget transfer in the block grant, which amounted to £140 million in 2011-12. However, should the Welsh Government want to take such a far-reaching departure as creating a co-operative out of the Welsh rail network it will have to negotiate new arrangements with London.
Apart from running the railways as a franchise operation the Welsh Government could own and run the system itself as a not for dividend company, probably operated at arms length by a National Rail Transport Authority. Some have argued that this would amount to nationalisation by the back door, though others have pointed to the current Network Rail position, responsible for the rail track throughout Britain, as offering a precedent for direct government involvement. Network Rail has a close relationship with the Department of Transport while remaining a not for dividend private sector company.
If the Welsh Government wished to continue a franchise arrangement, but not as a co-operative then it has two choices:
- A conventional franchise from the Welsh Government alone, rather than the present joint arrangement with the Department of Transport. In this scenario the operator would be a listed company, such as Arriva, First, Stagecoach or National Express. There would be no capital investment risk as all the assets – rolling stock, stations and track from Network Rail – would be leased for the life of the franchise. The revenue and operating cost risk would lie with the private company franchisee.
- A not for dividend company operated as a franchise from the Welsh Government. This would require the appearance in the market of new not for dividend companies bidding for the franchise in order to achieve meet European competition rules, unless it could be shown that a single such company was not obtaining competitive advantage. It has been suggested that Glas Cymru (upon which Network Rail was largely based) could be the model for a Welsh Train Operating Company with a guaranteed revenue stream and a highly capitalised registered asset base. This model only has the revenue stream guaranteed for the subsidy element and a buoyant and expanding market for the fare-paying element. Under this scenario the revenue and cost risk would again lie with the Company. To succeed it would have to match a public sector ethos with private sector commercial discipline.
Against these options a franchised co-operative company would be owned by the employees (as with the John Lewis Partnership) or the passengers (as with the Co-op) or, more likely some combination of the two – as is the case, for example with the Mondragon Eroski supermarket chain that operates through much of Spain. In this scenario the revenue and cost risk would lie with the employees and passengers. If the company mirrors the present retail companies the extent of the risk would be on the same basis.
Overall, with control of the rail network remaining in the hands of the Welsh Government. There would significant benefits from the franchising system whether it was the current Wales and Borders franchise arrangement (plus the Swansea – Bristol electric trains), a not for dividend company, or a co-operative supplier:
- It allows competition in terms of service provision ideas and funding levels
- It provides a more secure train market and service not entirely dependent on the commercial market
- It allows other economic, environmental and social factors to be taken into account.
- It prevents market instability through an operator of the last resort, that is the Welsh Government (see the parallel in South Central and the east Coast Main Line)
- It retains network benefits such as integration of services within the Welsh operation and in relation to Great Britain rail operations
- It gives value for money
- It can provide for the transfer from one operator to another and any phased changes required in connection with rail electrification.
- Subsidy forecasting can be more accurate
- It allows for integrated bus and rail branding.
- Increase integration of timetable, ticketing, and inter train operating company discounts.
The successful existence of the Co-operative shops and building societies suggests that any business with a large number of customers could be a mutual. This certainly includes a train operating company. Other advantages with the co-operative approach might include:
- A co-operative business could be expected to give a greater sense of collective ethos, which would help the industry though difficult times.
- Staff absences could be expected to be lower than other forms of business structures, as is claimed by the John Lewis Partnership.
- Many of the complaints about rail companies might disappear if the passenger felt a direct ownership. Of course, the last time the railways were in public ownership that didn’t happen though that might have been because, in effect, the British Rail model was no different from a conventional private company.
- Persuading travellers that the railway really was being run for their benefit might remove the ‘them and us’ perception.
Whatever change in the form of ownership is adopted, a key justification needs to be enhanced benefits for the passengers, the economy (and so the payer), the environment and society in general in Wales. These are some of the questions any new structure will need to address. Will there be:
- Increases in train frequency?
- Increased capacity on trains, hopefully with new electric trains, and especially on commuter routes to meet expected demand increases?
- Reduced journey times through faster trains?
- More modern, more comfortable trains?
- Higher levels of infrastructure investment at stations and on track and signals?
- Improved services and capacity for the same cost?
What then will be the main drivers towards a new rail management format? Reduction in cost has to be one primary reason but not necessarily at the expense of service quality. In all business restructuring the principles are:
- Reduce costs, through detailed examination of each model.
- Increase revenue, through improved marketing.
- Maintain or improve the service quality, through the passenger experience
In the Welsh context, alongside these considerations the Welsh Government needs to explore with the Department for Transport where the responsibility will finally stop in deciding the funding, ownership, control and organisation of the Welsh railway system following the end of the current franchise period in 2018. If the Welsh Government wishes to explore the advantages of far-reaching changes, such as moving towards co-operative ownership, then the balance of control is going to need to slant towards Wales and away from Whitehall. Have we the vision to move in this direction?