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This weekend East Coast main line train services passed from public to private hands. But is it realistic to talk about the rail network ever being renationalised?

A rare experiment in public ownership has come to an end.

Supporters say that Directly Operated Railways, a state-run body, rescued the East Coast main line after the collapse in 2009 of National Express's franchise. The firm had been unable to deliver promised revenues to the government.

Directly Operated Railways handed a billion pounds in premiums to the Treasury during its period in charge.

But after the government decided to return the franchise to private hands a bidding process in November gave it to a consortium of Virgin and Stagecoach - called Intercity Railways.

The unions and Labour have argued the line - which runs between London and Edinburgh - should have been kept in public hands.

Labour has suggested that it will review the franchising system and allow the public sector to bid to operate rail lines. The Conservatives say that would be unworkable.

John Major's Conservative government split up British Rail into a series of franchises 20 years ago.

Since then the number of passengers travelling on the railways has doubled. But the public subsidy has risen.

A YouGov survey in May 2014 suggested that the public supported renationalisation by a margin of 60% - 20%.

But how easy would it be to renationalise the railways?

Not difficult at all, says James Abbott, editor of Modern Railways. Network Rail, which manages the track, is already in public hands. The train companies have time-limited franchises. Once these have expired the government could get them back at no cost to the taxpayer.

Most of the franchises expire during the next parliament, which runs until May 2020. The exceptions are East Coast (2023), Thameslink, Southern, Great Northern, Chiltern (2021), and Essex Thameside - branded C2C - (2029).

If a government wanted the process to be quicker - or to avoid a mixed system - it's hard to say how much buying out the private sector would cost.

Mark Smith, who used to set fares at the Department of Transport and now runs the website The Man in Seat 61, says you could estimate what payouts would be needed by looking at each franchise's annual profits and then multiplying by how many years are left on it.

The rail industry says about ^250m is made in profits by the franchisees each year, about 3% of turnover.

There's also the question of UK and European Union legislation.

The Railways Act 1993 states that the public sector cannot bid for franchises. Either a totally new act would be needed to oversee nationalisation or there would need to be significant amendments to the existing act.

The EU says it wants to open up national freight and passenger markets to cross-border competition.

There are rules stating that the track and rolling stock must be managed separately - an attempt to allow free competition, although state-owned railways across the continent use holding companies in order to abide by this. A new European Commission strategy - the Fourth Railway package - to be voted on this summer by the European parliament could further pressure member states to open state-owned railways to private competition.

None of these hurdles are insurmountable, says Ian Taylor, author of Rebuilding Rail, a 2012 report for the trade unions. "The biggest obstacle to renationalising the railways is the prevailing dogma - the assumption that marketisation and competition must be best."

So what do the political parties say? Labour's official policy is to allow the state to bid for franchises. But in recent weeks new shadow transport secretary Michael Dugher has gone further.

"The public sector will be running sections of our rail network as soon as we can do that," he told the New Statesman recently. He ruled out a return to British Rail but said a Labour government would put "the whole franchising system as it stands today in the bin".

The Conservatives are against nationalising the network. A spokesman says that franchising has led to the most improved railways in the EU with record levels of investment, passenger numbers doubling and punctuality rates at record levels. The state ownership of East Coast main line shows that, he argues.

"While most operators spend more per journey than they get from passengers, East Coast hasn't. East Coast charged passengers on average more per journey, while running older, cheaper trains than on the privately run West Coast line. The new East Coast franchise will turn that round, bringing new services, new investment, more seats, state-of-the-art new trains and faster journeys - and it will return more to the taxpayer too."

Repainted and rebranded ^ Virgin Trains East Coast service leaves London

The reprivatised rail service embarked on its first journey on Monday but debate still rages whether it is best in private or public hands


The first repainted, rebranded and reprivatised Virgin Trains East Coast train left London Kings Cross station for Edinburgh at 11am on Monday, its new red-and-white livery signalling ^ according to one set of politicians and businessmen ^ a fresh chapter and better services for passengers.

After five years of public ownership, that view is disputed by unions and Labour, for whom East Coast became totemic in the argument over who should run rail transport.

Successful and profitable but with its financial returns going to the government rather than shareholders, East Coast^s significance was not lost on the coalition. They put it at the top of the franchising queue ahead of the general election.

However, the transport minister Claire Perry, at Kings Cross for Virgin TEC^s official launch, insists: ^It^s been a whipped-up political controversy.^ Labour had time in power to change the system had it wished, she says, adding that East Coast under the state-owned Directly Operated Railways (DOR) was never intended to be an ongoing operating company. ^It wasn^t able to make the investments like the ^140m of private sector money that will flow into this franchise.^

Over its eight-year franchise the new operator ^ a joint venture 90% owned by Stagecoach but with Richard Branson^s licensed brand ^ will bring more direct links to the capital and cut journey times after a new fleet of trains is introduced from 2019. The consortium will invest ^140m, partly spent on refurbishing the existing fleet and improving stations.

It should also pay ^3.3bn in premiums to the Treasury, says David Horne, managing director of Virgin Trains East Coast. ^When you look at [DOR] paying ^1bn in five years, that^s going to be a good deal for taxpayers.^

So what exactly is the magic touch that a private operator brings to make this all possible? On the first rebranded train on Monday, Horne says: ^It^s a commitment to customer service.^ If that concept seems nebulous, Horne cites a new ^3m ^customers and communities^ fund for investments and improvements along the line. ^We^re up for anything. When you bid for a franchise you^re looking forward to think what are customers going to need, but this fund gives a way to do different things that we haven^t thought of that customers may suggest.^

The remaining train exteriors will be retouched by August; addressing the ageing interiors will take longer, with refurbishment starting over two years from August. The franchise will include 65 new trains in 2019 under the Intercity Express Programme, ordered by the government from Hitachi, part-manufactured in the new Newton Aycliffe assembly plant in Co Durham. That replacement fleet means 50% more seats and a cut in journey times from London to Edinburgh to four hours. Horne says his firm^s experience will help: ^Between them Stagecoach and Virgin have introduced more trains to the new network than any other operator.^

One key contention of private operators^ supporters is that their innovation and customer service has increased passenger numbers. Pressed for specifics, Perry says: ^There will be free Wi-Fi, customer offers. There will be Nectar points. When is the last time that you heard of good old British Rail offering any kind of customer incentives?^

Even if the political divide can be encapsulated in a supermarket loyalty programme, the management of East Coast under DOR claims to have ^relentlessly focused^ on customers (it did, in fact, operate a rewards points scheme). In a valedictory email to stakeholders last week Karen Boswell, the outgoing managing director, trumpeted a record that saw the company garner awards and plaudits. She notes: ^We developed a strong East Coast brand from scratch and we created a relentless focus on the customer throughout our business ^ and we^ve been able to achieve one of the highest customer satisfaction ratings of any franchised long-distance operator in the country.^

A second argument is that staff will benefit. Perry says: ^The staff on East Coast, I^ve talked to dozens of them, are really excited to be working with two very customer-facing brands.^

Horne adds: ^One member said he^d wished we^d taken over years ago, I certainly haven^t detected regret that they^re not working for DOR any more. Most of them are looking forward to working for us because we^re going to provide a lot of investment and opportunities for them in the future: we have plans to invest in customer service training and an overall plan to develop the businesses.^

Boswell also claims the support of staff in her email however: ^We made significant investments in our people and assets; and above all, we rekindled a company spirit amongst our people ... we^ve been able to achieve an employee engagement score that is virtually unparalleled in the rail industry.^

The last private operator to run the franchise was, briefly, National Express, which handed the keys to DOR in 2009 after failing to meet its payments as the financial crisis hit. Refranchising might finally consign the transport operator^s ignominious moment to history, although Dean Finch, the chief executive who joined in 2010, says: ^I don^t believe any journalist is going to let National Express forget that in my lifetime.^ He is, unsurprisingly, pro-privatisation: ^The private sector profit take is not taking out a large wedge of money. In return it has contributed a vast amount.^

Despite East Coast^s success as one of only two firms to make a net contribution to government coffers over the last two years, its payments exceeding its subsidy, Finch says: ^The reflections on improved service, and punctuality, are only part of the story. [Was] the government getting more back than it would have under the previous contract, more than a private sector operator would have? I don^t think so.^ Finch says that East Coast had always been a profitable line, with relatively low leasing costs because of the old rolling stock ^ making it ripe for any operator.

Now, says Horne: ^People here have looked at what Virgin have done on the West Coast line and are excited by the prospect of a similar transformation of services.^ The image he uses is ^a hotel on wheels^, adding: ^There are very few commuters on this line ^ if people are using it, it^s because they want to, we have to impress them.^

The reaction of staff and passengers at York station on Monday was more prosaic, with few changes yet visible to most except the Virgin stickers in the window, new staff badges and plastic Virgin windcheaters concealing old uniforms to keep out the snow showers.

One passenger had travelled down from the north-east, but declined to be named, saying: ^m leftwing so I^d rather they renationalised, but I^m going to get on the train whoever^s running it. I can^t imagine it will make any difference to the service, just the money will be going to different people.^ Some staff ^ especially on board ^ are hopeful for change; others say that the ownership was less of an issue for employees than politicians. One commented: ^A job^s a job ^ makes no difference, so long as we get paid at the end of the month.^

Labour has now pledged to legislate swiftly for rail reform, with Michael Dugher, the shadow transport secretary, describing the end of East Coast trains as ^a hammer blow for passengers, taxpayers and employees alike^.

Perry^s retort on Monday was firm: ^We don^t talk about having a public sector energy company or a public sector airline.^ With the once state-owned British Airways^ parent company IAG forecasting ^2.2bn in profits this year, the minister could, however, be on to something. She adds: ^d like to see the Labour party^s proposal, Dugher Airlines, which I^m sure is coming.^

So why did National Excess fail where others succeeded? Could it just be that they weren't good at running railways?

So why did National Excess fail where others succeeded? Could it just be that they weren't good at running railways?

I think there is a case to allow DOR (or some fancy name) a UK Government Agency to bid for franchises and even with some routes lines which are subsidised to be given the concession to run them on the bases of a social operator; lets face it DB, Abirillo etc are all still quasi state companies, set up to get around the EU rules

The argument that because DB, Abellio and the others are subsidiaries of nationalised organisations, then an East Coast Railways/DOR-type operation should also be allowed to bid is false. DB, Abellio and Co. are, without a doubt, nationalised in one form or another - but they are NOT organs of the UK Government. That is the decisive difference.

I assume that DOR has now been effectively wrapped up or merged into the new franchise. Even if DOR were allowed to bid for another franchise, surely the people behind DOR have now moved on or been placed elsewhere?

I think you are largely correct.  The DfT does however keep a core of people on standby so that DOR can be activated at short notice to take on the next failing TOC. 

AIUI the 'core of people on standby' is DOR, and East Coast was their operating subsidiary, and it is the latter that was 'bought' by Intercity Railways (Stagecoach/Virgin).

So DOR as a government holding company will continue to exist, and still employ that core of people, but they are now on standby, however AFAICT the people are in the private sector, not civil servants.

I don't think the oft repeated statement that the ECML franchise was 'operated by DOR' is strictly correct.  They were operated by East Coast Ltd, supervised by DOR.

Paul

The issue is that if a UK Government owned or affiliated organisation bids for franchise or a concession and another department of the same UK Government also decides on the winner in such a competition then how does one know whether the selection process has been fair and above board? The DfT becomes judge, jury and executioner. Legal challenges would be inevitable.

The successful franchisee has to place a performance bond (as well as other bonds) to cover the costs of selecting a replacement in the case that it becomes insolvent during its tenure. These bonds are large, around the ^20 million mark, and a private bidder has to factor the costs of these bonds into his offer.

A UK-Government-backed operator cannot become insolvent (and DOR posted no such bond). Should a Government-backed operator also have to post a bond - and if so why?

So the conclusion of the above is that state run train operators are more cost-effective than private ones.

We ought therefore either have DOR competing for all (including foreign) franchises or ban SNCF, DB, NS etc from tendering for UK operations.

The words goose, sauce and gander spring to mind.

OTC

The reason why state run operators are likely to be more cost-effective franchise holders is mainly because they already understand how railways work and have the "network" access to skills etc,

The reason why state run operators are likely to be more cost-effective franchise holders is mainly because they already understand how railways work and have the "network" access to skills etc, also because they have more sympathetic financial management with more understanding and acceptance of actual risks.

Isn't it also because they can borrow money cheaper?  Although maybe the TOCs shouldn't need to borrow much money because they are so thinly capitalised.  The serious borrowing is done by the ROSCOs, and it is scandalously stupid that we have the current situation where the government specifies the new rolling stock (think Intercity Express) and who should use it and then steps aside and gets a private firm to arrange finance for it.  Private firm then goes to bank and bank offers a private firm a higher rate of interest than it would offer to HMG. 

After refurbishment no longer works, as should happen soon with Pacers, you can flog them to some emerging country overseas, where they will seem ultra-modern.

Nice work if you can get it, this ROSCO business. You are told what to buy, and who to lease it to. There is never any leftover stock. You can charge what you want, aiming for a return on investment well above the normal rates, because you can rely on the fiction that you need to recover the capital cost of the stock during the lifetime of the franchise, not over the lifetime of the asset. Dividing the cost of a train by the 15 years of a franchise gives double the return that dividing it by the 30-year life does, and you still have the train to rent to the next franchisee. After refurbishment no longer works, as should happen soon with Pacers, you can flog them to some emerging country overseas, where they will seem ultra-modern.

The profits made by the ROSCOs are not excessive. Eversholt, for example, manages assets worth about ^1.5 billion and has an annual turnover of around ^90 million. It made a profit before tax of about ^13.5 million, paid ^3.5 million in income tax and finished with a profit of about ^10 million. Seems about par for the course.

^10 Million represents a return on capital invested of 0.66%. That's not much more than the Bank of England's minimum lending rate. I hope Eversholt did not pay ^1.5 bn for the assets or they are getting a very poor return on their investment.  

There are several Eversholt companies as the source and management of their loans is quite complex and I didn't study all of them closely so there may be some footnote somewhere which explains it.

Ah so this is yet another company trying make its profits in countries where it is more advantageous. 

The pacer owner ROSCOs have already produced their glossy brochures to show that their 'assets' can be refreshed yet again to make them Equality Act and RVAR compliant. Sending them overseas is too much like hard work when UK PLC is still prepared to stump up for, and put up with, them.

I'd not be putting money on all the Class 14x fleet being retired from UK service by 31st December 2019.

Not forgetting of course that even if they aren't all modified by that date the Secretary of State has derogation powers to override EA and RVAR legislation if needs must...

Agree with all of that and would add that ROSCOs are not at all in the business of "flogging" their assets.  Why would they sell something for a one off payment when they can lease it out for an on-going return.