This report is from this week’s CNBC’s UK Exchange newsletter. Each Wednesday, Ian King brings you expert insights on the most important business stories from the U.K. and other key developments you won’t want to miss. Like what you see? You can subscribe here.
The dispatch
Some 31 years after they were privatized, the U.K.’s railways are heading back into public ownership.
The country’s railway tracks, stations, tunnels and signals were effectively renationalized in 2002, but it was a policy of the current Labour administration, when they were elected last year, to bring operation of the trains themselves back to the state.
Only the rolling stock — the coaches, locomotives and freight wagons — and most of the rail freight operators are to remain in private hands, with one important exception, to which we shall come.
Accordingly, in May this year, the rail franchise responsible for running trains to and from London Waterloo — rechristened South Western Railway — was returned to state ownership.
Appropriately enough, for Britons of a certain age who remember the old British Rail’s dilapidated trains and appalling service prior to privatization, the first nationalized service involved a rail replacement bus.
The renationalization process will continue when, later this month, c2c, which runs trains between London and Essex, is taken into state ownership, with Greater Anglia, which operates trains in the east of England, due to follow in the coming months.
With four operators — London North Eastern Railway (LNER), Northern, Southeastern and TransPennine Express — already state-owned, the government has promised that all remaining privately run rail franchises will be renationalized by the end of this parliament.
It also intends to integrate train and track operations into a new entity, Great British Railways, ending the separation of the network and train operations that took place at privatization.
A LNER train seen at the King’s Cross station.
Sopa Images | Lightrocket | Getty Images
But that isn’t quite the end of the story.
While debate still rages over whether or not rail privatization was a success — on the plus side, it led to a huge increase in passenger numbers and better rolling stock; on the flip side, it led to significantly higher fares — one positive on which most industry experts agree is the emergence of so-called “open access” operators.
These compete with the franchised operators, now being nationalized, which hold contracts with the government to run services. Unlike the franchised operators, open access operators take on all the risk of ticket and other revenues falling short of expectations.
Their presence has been felt most keenly on the East Coast Main Line, which connects Edinburgh with London and serves Yorkshire, the east Midlands and the northeast of England.
Open access operators such as Lumo and Hull Trains are credited with raising standards and bringing down fares. Significantly, the East Coast Main Line is the only part of the U.K. rail network where passenger numbers have recovered to pre-pandemic levels.
Despite these achievements, open access is not universally popular. Britain’s powerful rail unions hate it and so, it has long been suspected, do civil servants in the Department for Transport (DfT). It has come into greater focus because, during the last year, there have been a record number of applications made by companies to operate trains under open access.
This prompted Heidi Alexander, the new transport secretary, to write in January to Declan Collier, chairman of the Office for Rail and Road (ORR), the industry regulator, warning him to adopt a more rigorous approach toward open access applications.
She ordered him to take into account whether there would be sufficient capacity on the rail network for new services and raised concerns that open access operators do not meet the full cost of track access. She also told him to be mindful of whether the new operators would deprive existing operators of revenues.
That raised concerns that Alexander could be simply doing the bidding of the rail unions and looking to protect state-run operators like LNER from the blast of competition. These worries were heightened when, at the end of June, Richard Goodman, one of the senior civil servants in the DfT, wrote to Collier to reinforce Alexander’s message.
“DfT analysis suggests that the sum of annual abstraction of each of the currently live open access applications would be up to £229 million (24/25 prices), not accounting for the revenue impacts resulting from those services interacting,” he wrote.
“This represents a significant additional cost to taxpayers and would materially affect the funds available to the Secretary of State.”
Some saw this letter as an attempt to dissuade the ORR from approving new applications.
If that was the intention, the tactic appears to have worked.
Last week, the ORR rejected applications from three companies seeking track access contracts with Network Rail to run services on the West Coast Main Line, which connects Glasgow to London and serves major cities including Birmingham, Liverpool and Manchester.
Explaining the decision, the ORR’s Stephanie Tobyn said: “It was clear that there was insufficient capacity to approve any of the services without a serious negative impact on the level of train performance that passengers experience on the West Coast Main Line.”
Among those whose application was blocked was Richard Branson’s Virgin Trains, a previous — and popular — franchise operator on the West Coast Main Line, which called the decision “a blow for consumer choice and competition.”
The news also disappointed businesses in parts of the country currently underserved by the existing network. A good example is Shropshire, where there was strong support for plans from a new operator, Wrexham, Shropshire and Midlands Railway, owned by the French rolling stock manufacturer Alstom, to run five trains per day between Shropshire and London.
All of this has raised fears that Alexander and the rail minister Peter Hendy, an industry lifer, are determined to kill open access — whose operators would be too expensive to renationalize — altogether.
For its part, the Department for Transport says this is untrue.
“We’re supportive of Open Access services where they encourage growth, improve connectivity and provide more choice for passengers,” a DfT spokesperson told CNBC. “However, Open Access shouldn’t come at a cost to the taxpayer or negatively impact performance.”
A geographical divide
The debate around open access could lead to an intriguing clash within the government.
Alexander, while now MP for Swindon, in Wiltshire, has spent her entire career in London in both local and national politics. Hendy, too, has spent his career in the capital, mainly working for state-owned Transport for London and its predecessor London Transport. As such, their thinking on the railways has been informed by the capital’s transport system, which is very different from that of the rest of the country.
Other senior figures in government, like Home Secretary Yvette Cooper and Education Secretary Bridget Phillipson, may have an alternative view. The pair represent constituencies in Yorkshire and the northeast, respectively, and will know how popular open access operators are among their constituents for maintaining competition and driving down prices.
They may also be able to count on the support of Chancellor Rachel Reeves, whose constituency is in Leeds — the biggest city in Yorkshire not yet enjoying a direct service provided by an open access operator.
MPs representing seats that are home to rolling stock manufacturers like Alstom, Siemens and Hitachi — which support thousands of skilled manufacturing jobs — could also be expected to support open access.
Alstom and Siemens have both recently warned of a failure by ministers to sign off on a backlog of new orders, while Hitachi won a £500 million contract from Lumo to deliver 14 new trains in December last year.
In any case, Alexander and Hendy should have other priorities. For example, it is unclear when Great British Railways will formally launch, or who will be its chief executive.
There is also the running sore that is HS2, a project originally intended to build a new high-speed rail between London and cities in the Midlands and north of England, but which will now only run to Birmingham and is both years behind schedule and billions of pounds over budget.
Meanwhile, having been in a position when the railways were close to covering their daily running costs prior to the pandemic, taxpayer subsidies have since ballooned.
In 2022-23, the most recent year for which figures are available, government support to the railways totaled £21.1 billion, up 64.5% on the level prior to the pandemic, while passenger revenues came in at just £9.2 billion, down 31% on pre-pandemic levels.
The growth in working from home means commuter numbers are unlikely to recover to pre-pandemic levels. That means, if total passenger numbers are ever to be rebuilt, the railways will have to do more to attract leisure travelers. That is a task for which the open access operators, with their experience of innovation in fares and services, are ideally suited.
— Ian King
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Need to know
In the markets
The U.K.’s FTSE 100 has chugged along nicely over the past week, rising around 0.65% provisionally, about 0.35% off the record high reached in June.
In case you missed it, fundraising from London IPOs has slumped to at least a three-decade low in the first half of this year — raising fresh questions about the allure of the U.K. as a hub for global capital.
The performance of the Financial Times Stock Exchange 100 Index over the past year.
A perceived lack of forceful backing for Britain’s finance minister by her prime minister last week hit both the U.K. currency and government bond market. The British pound is currently trading around $1.35 to a dollar, less than $1.37 — where it was before June 2.
Similarly, gilt yields currently trading at 4.63% are yet to fall back to levels seen before the Parliamentary showdown began.
