Why the government is not actually renationalising the railways

The government this week unveiled major reforms to the way Britain’s railways will be run. There’s no doubt that these are significant changes and represent the biggest change to the industry’s structure since privatisation in the 1990s.

Some commentators have suggested that the railways are effectively being renationalised, but this isn't really correct. To understand why, let’s unpack the reforms.

Before the pandemic, railways were operated by private franchise holders. Private companies bid for and won contracts to operate a certain franchise for a number of years, in a competition run by the Department for Transport (DfT).

The company that won the franchise would pay an agreed sum of money (a “premium”) to the government to operate it, and in return they kept the revenue – which they hoped would be more than the money they had to pay.

The DfT specified some things about how the railway should be run, but otherwise franchisees had a bit of freedom to do what they thought was best.

The idea of this system was to foster competition at the bidding stage and to incentivise franchisees to innovate to raise revenues.

Unfortunately there were some problems with the franchising system and it is generally agreed that the competition system did not work very well.

Fundamentally, there are a limited number of ways you can run trains, especially on a busy network like the one in Britain where operators have to squeeze out every drop of capacity.

Often it seemed like the easiest way to raise revenue was to do things like crack down on fare evasion and instal ticket gates at stations, rather than to try and make major improvements to the service.

This was compounded by the fact franchise periods were usually relatively short, meaning significant investments to fundamentally overhaul services were risky and could simply end up benefiting the next franchisee instead of the company making them. Lengthening the franchise period would conversely have carried the risk of the company just sitting on its laurels.

Where there are exceptions, such as improvements in the Noughties on the West Coast Main Line, franchisees generally had to work in concert with government – which was sometimes interested and sometimes not.

The competition at the bidding stage for franchises didn’t work too well either. The late phase of the franchising system was marked by a pattern: companies would bid for a franchise and promise to pay a huge premium to win the bid.

Having bid high based on optimistic projections, they would then actually make a loss and try to renegotiate the premium down. Either they succeeded and the taxpayer took the hit, or they would drop out of the franchise and the government would be forced to take over and run it in the public sector. This happened repeatedly to the East Coast Main Line and others.

This process of franchising breaking down accelerated during the pandemic, when virtually no company made anywhere near enough money to cover their premiums because passengers were ordered to stay at home. As an emergency measure the government initially extended them emergency support – and then took over the revenue risk altogether.

This latter change of the government keeping the fares and the revenue risk is at the centre of the new system the government is moving to after its latest reforms.

Private companies will still bid for contracts to run services, but they will operate on the basis of a “concession” rather than a franchise.

Under the concession model, it is the government that pays a fixed fee to the private company running the services, for services rendered. But the government specs everything about the service and the private company is effectively a delivery body, like a contractor. The government also keeps the revenue from the fares. The incentive for the concessionaire to do a good job is simply that the contract is written with performance targets that must be met to avoid a penalty.

This is not a new model – it is similar to the one used on the London Overground, which is delivered by the company Arriva under Transport for London branding and specification. Ironically, this is a subsidiary of German state railway Deutsche Bahn. It is reasonable to ask why the German public company is trusted to run the system but a British one is not, and what the private company actually brings to the process when TfL appears perfectly capable of running the London Underground in the same city.

The other big change in the government’s plans are that it will set up a new body called Great British Railways. The name appears to be a desparate attempt to avoid calling it British Rail.

This is a public body separate from the government, and it will take over responsibility for everything to do with the railways: letting the contracts, selling tickets, setting fares, specifying the services, and other important things such as strategically planning the network.

It will also take over Network Rail, the public body that currently owns the tracks themselves, which have been public since Railtrack, the private company set up to maintain them at privatisation, collapsed after a string of deadly failures.

But what it is not is a rail operator or a railway company like British Rail. It is a public authority that will let contracts for services in the way the DfT does now to private companies. (It will have more limited functions in Scotland and Wales, while Northern Ireland’s system is entirely separate and fully nationalised.)

Yet setting up a body separate from the DfT is quite a significant move. One ironic change since the end of British Rail has been that civil servants have actually been more involved in micromanaging the railways than they were under nationalisation – perhaps ever.

Under British Rail the system was run by career railway managers, often with operational experience, in effectively a separate organisation dedicated to running railways. Under privatisation the railway managers work at the franchise level and have been regularly rotated around in a fragmented system, with a Whitehall department under the control of regularly changing ministers the only constant.

So while it is right to say that the railways will be under great public control than under franchising, they will remain as privatised as ever.