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The Spring Budget reminds us that we must urgently fix rail finances

The Spring Budget reminds us that we must urgently fix rail finances

08 March 2023
Andy Bagnall, chief executive

'We have a broken model. Unable to adapt to customer needs and financially unsustainable. Left untreated, we will drive passengers away with poor performance, that will lead to fewer services that will drive more passengers away and so on and so on.' That was the Transport Secretary’s sobering diagnosis of our railways at the packed-out George Bradshaw Address earlier this month, as he set out his plans for rail reform.

So, with one week to go until the budget, when political attention overwhelmingly turns to the state of the nation’s finances, how do we as an industry create a financially sustainable rail model and reverse a spiral of decline? The simple answer is that we need to run towards the problems facing our railway and tackle them head on. Why? Not only because passengers, freight customers and the taxpayer demands rapid improvement, but because the Transport Secretary was clear in his speech that he has the expressed support of both the Chancellor and the Prime Minister to reform our railways.

That last point is crucial – if Harper has convinced Hunt and Sunak that rail reform is necessary not only to stabilise rail finances, but also to ensure the railways play their full part in economic growth, both Whitehall and industry must step up to the plate and deliver on that direction from cabinet. While highly damaging industrial action rumbles on, and inflationary pressures make the railway’s investment programme for the next five years challenging – both industry and government need to implement reforms to set the railway up to succeed for the next thirty years.

The first step we must take is to move rail operators on from being seen simply as a cost line on the Treasury’s books, to being revenue generative once again. That means rewiring the National Rail Contracts and making the necessary changes to give private sector operators the chance to do what they do best: attract customers back and grow revenues.

The positives for the Exchequer, were government to make these changes, are significant - Independent analysis conducted for Rail Partners by the consultancy Oxera shows up to £1.6 billion to £2.1 billion in revenue is potentially being missed over the next two years of the Spending Review because of the current inflexible contractual arrangements.

For clarity, we’re not talking about going back to franchising – Rail Partners continues to be an advocate of setting up Great British Railways to act as a strategic ‘guiding mind’ to oversee a restructured public-private partnership – but the private sector must be involved to ensure further investment and innovation, in order to reduce the burden on the taxpayer.

Let’s not forget, the private sector operators helped more than double passenger numbers and turn an annual industry operating deficit of £2bn into an operating surplus – they can help achieve this again, but under a more coherent and accountable system.

The second step is to reunite cost and revenue so that one government department has a holistic view of railway finances – As Mark Harper said in his speech, we need to treat the railway as 'the whole system it should be rather than the web of disparate interests that it’s become'.

It is counter-intuitive to have Treasury looking at revenue (which is currently on average hovering around 85% of pre-pandemic levels), and DfT focussed solely on costs (which are still at 100%). Rather, we need a single entity looking at both sides of the ledger – cost and revenue – and not have them considered separately. The current arrangements create incentives to cut revenue generating costs that make the net financial position worse rather than better.

The third step is for government to set an ambitious target to treble the amount of freight moved by rail by 2050. New analysis conducted for Rail Partners demonstrates that this will create a minimum of nearly £5.2bn in economic benefits annually and remove over 20 million HGV journeys from the road network each year. Also, small budget measures like increasing the Mode Shift Revenue Support Scheme could have a disproportionately positive impact in enabling more customers to transfer from road to rail.

With these reform measures, we can begin to change the persistent Treasury perception of the railway as a drag on the nation’s finances. Instead, it can begin to play a fuller role in the economic recovery of the country – connecting people to opportunity, drawing businesses in to invest, and decongesting our roads. You don’t have to be a rail user to feel the benefits that these changes would bring.

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A fork in the tracks: We must act now to attract customers back and avoid a spiral of decline on the railway
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