Fare’s fair: does UK rail offer value for money?

19 January 2015 (Last Updated January 19th, 2015 18:30)

With many UK rail fares rising well beyond inflation since privatisation in 1993, high customer costs risk damaging rail travel’s value proposition as an alternative to the road. Why hasn’t private sector competition brought lower fares as some might have expected, and does nationalisation offer the prospect of a clearer and more reasonable fare system?

Fare’s fair: does UK rail offer value for money?

Passenger fares

When the Conservative-led UK government kicked off the process of privatising the country's railways in 1993, it faced stiff opposition. Labour Party resistance was staunch, and the scale of lobbying against the nascent Railways Bill was a testament to the deep suspicion with which the public regarded rail privatisation.

Nevertheless, the Railways Act was pushed through and paved the way for the UK's privatised rail system, with companies bidding to operate the country's 16 current rail franchises. Then-Prime Minister John Major justified the decision on the promise that "franchises will provide a better, cheaper and more effective service for the commuter".

Two decades on from the Railways Act, many believe that the UK rail system has failed to deliver this promise on all counts. The most egregious failure in many British passengers' minds is the cost of travelling by train. In a recent survey of more than 3,500 passengers by UK transport watchdog Passenger Focus, value for money placed top of the list in terms of priorities for improvement - above overcrowding, punctuality and service frequency. Judging only by the sentiment of today's rail passengers, the natural conclusion would be that the UK's rail system has failed to deliver value for money for its users.

How high are rail fares in the UK?

But do the raw numbers back up the anecdotal experience of UK rail passengers? Unsurprisingly, there's no simple answer that can be stated in binary terms, although the evidence suggests the answer would be closer to a 'yes' than a 'no'. Still, such is the complexity of the British rail fare system that fare increases differ wildly between different services and ticket types purchased.

Between 1995 and 2013, government-regulated fare types such as season tickets and off-peak returns have generally limited their price increases to around 66%, or the rate of inflation since 1995, as measured by the Retail Prices Index. Standard single tickets, not subject to government capping, have shot up massively since 1995, with routes such as those between London and cities like Manchester, Exeter and Cardiff recording fare increases approaching or exceeding 200%.



Overcrowding on London’s rail network is not a new problem, but the stakes are high and new capacity is urgently required.


Still, anomalies exist within this general pattern, with train operators sometimes finding loopholes in regulated fare structures, leading to deviations such as an off-peak return from London to Leeds rising from £55 in 1995 to £154 in 2013. Despite the massive variation, in broad terms the average UK train ticket price has risen 22% in real terms since privatisation, according to a 2013 report by think tank Just Economics.

When compared to its European neighbours, the UK has also struggled to compete on fare prices. A study published in January by the Trades Union Congress (TUC) - and it should be noted that UK trade unions are generally very much in favour of rail renationalisation - found that British passengers were paying over three times more of their salary on fares compared to public rail users in France, Germany, Italy and Spain.

"While the shareholders of the private train operating companies are doing well for themselves on the back of massive public subsidies, passengers are paying the highest share of their wages on rail fares in Europe," said TUC general secretary Frances O'Grady. "Rail passengers must wonder why they can't have the same cheap and more efficiently run state rail services that exist elsewhere in Europe."

The case for renationalisation

It's possible to quibble over the numbers almost indefinitely; it has been established that rail fares in the UK are high and even regulated fares are rising faster than many commuters' ability to keep up with them. "During this Parliament, many fares have risen three times faster than wages, affecting all those who rely on trains and putting enormous strain on household budgets," said the Campaign for Better Transport's Martin Abrams in December 2014, responding to the latest round of fare increases taking effect in January 2015.

But is renationalisation a valid method of reducing rail fares? For many campaigners and trade unions, the answer is unequivocal. The 'Rebuilding Rail' report commissioned by the Transport Salaried Staff Association trade union in 2012 sets out the central argument for renationalisation so often quoted by campaigners that the public funding of privatised rail is actually significantly higher than during the days of British Rail - from around £2.4bn a year in the period 1990-95 to approximately £5.4bn a year in the period 2005-10.

"Renationalisation 'would equate to an across-the-board cut in fares of 18%', the researchers noted."

Much of this disparity is down to private sector costs like debt write-offs, the complex financial and contractual arrangements created by a fragmented system and dividend payments to investors. A subsequent TUC-commissioned study undertaken at Manchester University attributed further costs to hidden subsidies like Network Rail's discounting of track access charges for train operating companies, from £3.19bn in 1994 to £1.59bn in 2012, according to a subsequent TUC-commissioned study undertaken at Manchester University.

Rebuilding Rail argued that renationalising and eliminating unnecessary costs would result in a public saving of around £1.2bn per year. This saving, if entirely channelled into reducing fares, "would equate to an across-the-board cut in fares of 18%", the researchers noted.

Furthermore, recent developments in the UK rail industry over the last five years appear to have cast doubts on the effectiveness of the franchising system - the Virgin/FirstGroup debacle during bidding for the West Coast Main Line in 2012 and the financial collapse of National Express East Coast (NXEC) spring to mind - while the successful operation of the East Coast Main Line by state-owned holding company Directly Operated Railways (DOR) after NXEC's failure has given the public greater confidence that public operators are capable of running franchises and returning a healthy profit to the Treasury. Given that other metrics of customer satisfaction are all wrapped up in the passenger's perception of value for money, DOR's impressive satisfaction scores are an indicator that public organisations could be up to the task.

At the very least, wrote London Assembly Labour Group transport spokeswoman Val Shawcross in an editorial for the New Statesman, state-run companies like DOR should be able to compete with private companies. "Those who want to continue with a dogmatic free-market approach must follow their own logic," she argued. "If they believe private companies are superior to the public sector, why should they worry about competing with DOR?"

Reorganisation over renationalisation

The prospect of DOR competing with private companies on a level, free-market playing field is an eminently viable one - and one that is being proposed by the opposition Labour Party leading into the 2015 general election - but it has proven a locus of disagreement from those who believe renationalisation, or even steps towards it, would be moving in the wrong direction.



London mayor Boris Johnson announced in 2013 that all ticket offices on the London Underground are to close, leading to a loss of approximately 1,000 jobs.


One of the advantages of the franchise bidding system is that the significant costs of working out which operator would be best to run a line are absorbed by private industry, while the Department for Transport is able to make a free choice. An editorial published in The Economist in summer 2014 quoted transport expert Roger Ford, who said that if a state-backed company like DOR were able to compete, taxpayers' money would essentially be used to fund a bid, which would be wasted if that bid then failed. "It is seemingly unclear as to why the government would provide the money to make the bid, but then award the franchise to the best bidder at the expense of the state," the editorial argues.

Of course, this argument doesn't address full nationalisation, but others have offered arguments against this move too. Institute of Economic Affairs deputy editorial director and transport policy expert Dr Richard Wellings has argued that the UK rail system should move further towards privatisation, not away from it. Wellings asserted in a December 2014 article that the government's retention of control over regulation, funding and other key decisions means it is only partly privatised, stifling the industry's ability to innovate and reduce the costs of a fragmented network. Returning to a public rail system would simply make matters worse.

"The shortcomings of state-owned enterprises are well documented, and include poor cost control, lack of entrepreneurship, susceptibility to political interference and endemic misallocation of resources," he wrote. "In the longer term, these inefficiencies would tend to lower productivity on the railways, resulting in some combination of higher fares, higher subsidies or reduced quality of service. A range of new problems would be added to an already suboptimal industry structure."

Even outside of ideological differences, one can't ignore the fact that many of the most significant recommendations for reducing rail fares are achievable without embarking on anything so radical as partial or complete renationalisation. The Campaign for Better Transport is campaigning for the use of the Consumer Price Index rather than the Retail Price Index to work out the rate of regulated fare increases, which it says would lead to more reasonable fares without unduly compromising railway revenues. Other measures to improve the fare system, such as ticketing harmonisation to minimise confusion about fare types and flexible tickets for part-time workers, are also possible (if more complex) by tweaking the system as it stands.

However it's achieved, stabilising rail fares cuts to the core of what public rail transport means to the UK as a society. If above-inflation fare rises continue unabated there is a risk that train travel would become a preserve of the wealthy, pushing everyone else back into their carbon-intensive cars. If the railways (and public transport more widely) exist to encourage us to travel more efficiently together, the cost of that travel must, at the very least, be competitive with the dirtier and more convenient methods of getting around. Otherwise, it's hard not to question the point of even having a railway, public or private.

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