18 Jun 2024

Getting Britain moving

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Does nationalising the cost of the railways mean nationalising the profit?

In both its policy document 'Getting Britain Moving' published on 25 April 2024 (the "Rail Policy") and its general election manifesto published on 13 June 2024 (the "Manifesto") the Labour Party has confirmed its intention to nationalise passenger services within England. Specifically, a new arm's length body - Great British Railways ("GBR") – would be established to be a "directing mind" in charge of both infrastructure and operational services. GBR is itself not a new idea and is one which the current government have been moving towards following the publication of the Plan for Rail in May 2021. However, the Rail Policy and Manifesto set out Labour's plan that nationalisation would be achieved by taking over services currently performed under National Rail Contracts ("NRCs") once they reach their contractual expiry date.

On 9 July 2024, Stephenson Harwood LLP and AtkinsRéalis are hosting a Top Table Lunch during which Juergen Maier (the head of Labour's rail infrastructure review) will be in conversation with Stephenson Harwood partner Tammy Samuel. If Labour win the general election on 4 July 2024, then this will be the first opportunity for the rail industry to learn more of its plans.

Ahead of this Top Table Lunch we are releasing four briefing notes to set out key issues that remain to be explored and developed with regard to (1) the funding of GBR; (2) what GBR means for the operation of passenger and freight services; (3) how GBR will interplay with Labour's devolution agenda and what that means for levelling up; and (4) pensions implications for existing train operating companies and GBR.

This first briefing note examines the central cost and funding that we believe still require clarification and sets out three key areas on how GBR will be funded, how GBR will manage its costs and what opportunities may remain for private passenger service operators.

1. How will Great British Railways be funded?

The Rail Policy suggests that savings of up to £2.2 billion can be achieved through a single infrastructure and passenger services company, but it is coy on precisely how the new entity will be funded. Indeed, on the day of its launch Louise Haigh admitted that the Shadow Chancellor, Rachel Reeves, has not committed to funding levels for GBR. Questions about funding are becoming more acute as the general election campaign continues and Labour walks back some previous policy statements (such as tuition fees) and clarifies other policies (such as Great British Energy) in response to concerns about the economy that they will inherit if they win. Unfortunately, the Manifesto does not offer any further detail on the implications for GBR.

What will happen to ticket revenue?

It seems likely that GBR will be funded through a combination of sources:

  • direct grant from the Government;
  • access charges for use of infrastructure, paid by passenger and freight operators; and
  • income from the commercial property estate.

It is not clear whether GBR will also retain ticket revenue received from passenger service operation. Under the current NRC model, ticket revenue is passed to HM Treasury, reflecting the fact that the Government has taken on revenue risk while the Government also sets regulated fare levels. With GBR being an arms-length body and intended to improve passenger services, it would make sense for GBR to keep whatever revenue it is able to generate. This is particularly the case given Labour's intention to review the current fares system in order to simplify it and bring in digital innovation – a GBR that can simplify and set its own fares (even if within specified parameters) could be more responsive to passenger demand and increase passenger service usage away from political and HM Treasury pressure.

The end of Control Periods?

Also unclear is the time period for which GBR's budget will be set. Given that GBR will use Network Rail as a base and that the Rail Policy explicitly discusses having a long-term plan updated on a five-year basis, it is reasonable to assume that it will function on the existing five-year control period basis. The advantage here is that it is known industry process that is well understood and given that Control Period 7 started on 1 April 2024 and will last until 31 March 2029, is one that will dovetail neatly into the next period of government.

However a perennial rail industry complaint is that it needs longer term certainty on funding, especially for critical infrastructure projects, as experiences with HS2 have demonstrated. Similarly critics point out that a five-year cost plan makes a nationalised GBR more susceptible to political pressure as and when Governments change. Given that Control Period 7 will end in 2029 just as the next general election cycle will be gearing up, there is a risk that depending on how the United Kingdom's economy is performing, GBR's budget will be a significant political issue. For those readers old enough to remember the days of British Rail, it also raises the spectre of the GBR budget becoming a political football depending on which party is in power, thus further damaging the industry's need for long term funding certainty.

2. Will GBR lead to cost savings?

One of the repeated messages throughout the Rail Policy is that it believes there are significant cost savings to be achieved through unification under GBR. These fall into the following three areas:

Bid costs

Labour correctly argues that unifying passenger services into GBR will mean Government will no longer incur the bid costs (including consultancy and advisor costs) associated with tendering passenger services. It will also reduce the risk of unexpected costs to the public purse in the event of a challenge to a franchise award, as happened on a number of occasions while the franchise model was still in operation.

What is unclear is whether the Labour party has considered all of the potential cost impacts of taking back passenger services as the various NRCs reach their expiry dates. With the first tranche of NRCs due to expire before legislation can realistically be passed to establish GBR, passenger operators will presumably pass to the operator of last resort ("OLR"). The issue is that the OLR is already stretched with the four existing franchises that it's running and so may well need to buy in resource and expertise to help manage any further passenger franchise areas (or let contracts to the private sector to do so). And experience is already showing that OLR is not a magic bullet for resolving the issues those operations face. Once GBR is set up and takes on board more passenger services as later NRC tranches expire, it is likely to find considerable duplication of staff with regards to back office functions, e.g. payroll and human resources, which will need to be rationalised and the redundancy costs paid for.

Fleet rationalisation

The Rail Policy suggests that Labour are eying up potential savings from rationalising the 75 different types of train currently used to provide passenger services and thereby save on maintenance, regulation and crew training. It will be interesting to see if such savings can be achieved in practice. The nature of the various passenger service franchise areas means that not all passenger trains can be run on all routes – much depends on the nature of the infrastructure, including station platform length, whether the line has been electrified etc.

Financially, as a unified passenger service entity GBR should have considerably more negotiating power when it comes to negotiating or renegotiating leases with the ROSCOs than existing operators. However given that the intention is to roll passenger services into OLR/GBR as and when the NRCs expire in the interim, then OLR/GBR will be inheriting the existing rolling stock lease terms and thereby not achieving any immediate savings. In fact, until all or a majority of NRCs are taken over by GBR there is unlikely to be a real opportunity for GBR to assess what its whole fleet needs are, meaning that it will likely have to negotiate short or medium-term extensions to its inherited rolling stock leases in order to continue provision of passenger services and could well pay a premium to do so.

Dispute costs

Labour point to the significant costs currently incurred by both Network Rail and passenger operators in fault allocation disputes, made more acute by the fact that passenger operator costs are currently covered by the Government. A single GBR entity will certainly strip out the duplication element (subject to payment of any associated redundancy costs) but a disputes team will still be needed for dealing with freight and open access operators to the extent that they incur losses caused by GBR. In addition measures may still be needed to compare and contrast operations or show to the public how the railway is performing.

Conclusion

A new GBR entity would undoubtedly benefit from economies of scale when it comes to negotiating new contracts and operating functions that would otherwise be replicated across different passenger operators. However those cost savings will not be instant and GBR may well find itself facing significant up-front costs as a result of workforce rationalisation, fleet rationalisation and supply chain rationalisation. The scale of anticipated savings may in reality be more difficult to find.

3. Does GBR mean the end of private sector involvement in passenger services?

On the face of it, the Rail Policy and Manifesto seemed to sound the death knell of private passenger service operation in England (Wales, Northern Ireland and Scotland all already being operated by public sector bodies). However, if a week is a long time in politics then two months is almost a geological epoch.

One of the early themes of the general election campaign so far has been that Labour is not planning to open the nation's cheque book and the question of how policy pledges will be met (whether by taxation or increased borrowing) has already dominated the televised debates. The Manifesto essentially summarises the key themes within the Rail Policy but it is interesting that while both the Rail Policy and Manifesto talks of GBR as being "responsible for day-to-day operational delivery", it doesn't say that GBR will undertake operational delivery itself. There may well therefore be a chink of light for private operators to retain some involvement either through a straight-forward management contract or even under a concession-based model under GBR control. With the Manifesto's focus on devolution and declaration that Mayors will have a role in designing services in their local areas and some of the current Mayors - notably Andy Burnham in Manchester – talking about wanting to unify regional public transport under devolved control, it is not wholly inconceivable that this could resemble Transport for London's processes to re-concession to the private sector its Docklands Light Railway, Elizabeth Line and London Overground services.

Even if this is not the case, the Rail Policy and Manifesto both demonstrate that Labour is keeping the door open for open access operators to provide services. Admittedly, this would see private companies take more risk and would be subject – as the Rail Policy makes clear – to capacity on the network but 2024 has shown that there is an appetite for this. For example, in April Alstom announced it is heading a group intending to provide an open access service between Wrexham and the West Midlands, while in May First Group submitted an initial application for open access services between London and Rochester and Virgin submitted an open access application for routes along the West Coast route. Given the potential for open access operators to essentially 'cannibalise' profitable intercity routes, it would not be surprising for GBR to be resistant to applications to use relevant infrastructure (especially given that it would control access to all publicly owned stations in addition to the track and signalling) but given the continued role of the ORR in mediating fair access, GBR's scope for shenanigans may well be limited.

Labour seems open to GBR using the expertise of the private sector in helping it meet and improve passenger expectations. Even if a concession contract or management contract role is not available, then there would certainly be consultancy opportunities to draw out private operator experience. One of the many criticisms of British Rail was that its thinking on customer experience was ossified whereas privatisation encouraged operators to learn from other travel industries in terms of trying to drive up use, e.g. through on-board service, the introduction of loyalty schemes etc. There may equally be scope for operators to assist with other services/functions within GBR, for example just as Network Rail currently uses the private sector to deliver on its infrastructure works, GBR may use the private sector to provide digital services (such as on ticketing), customer support (such as telephone services, management of delay/repay and compensation claims), fleet optimisation, maintenance management and procurement (where operators have considerable expertise to offer) and back-office functions such as human resources and payroll.

Given that Keir Starmer's Labour Party seems to be politically closer to the 'third way'/public-private partnership policies of Tony Blair than to the nationalisation and public control policies of Jeremy Corbyn, there is every reason for optimism that the private sector will continue to have a role.

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KEY CONTACT

Tammy Samuel

Tammy Samuel
Partner and co head of rail

T:  +44 20 7809 2227 M:  +44 7766 991 053 Email Tammy | Vcard Office:  London

Suzanne Tarplee

Suzanne Tarplee
Partner and co head of rail

T:  +44 20 7809 2389 M:  +44 7718 247 220 Email Suzanne | Vcard Office:  London