What a way to cost a railway

The railway’s cost allocation system is dumping costs on the sector least able to afford them – regional rail. It must be changed.

And so it came to pass that the Office of Rail Regulation issued the subsidy figures  for the different parts of the railway which were engraved on tablets of stone. And a hush descended as the great multitude of executives, lawyers, consultants, officials and economists, and others of the vast and well renumerated tribes of the privatised railway, gazed upon them. Verily those regional railways look expensive they thought. Useful stats if we need to give them a good kicking later on.

I adopt an ersatz biblical tone because the way in which the subsidy figures for different parts of the railway are presented is often done as if they were written on tablets of stone. Absolute truths handed down by a greater intelligence. However as our recent report, ‘A heavy load to bear? Towards a fairer allocation of rail industry costs for regional rail’ shows the reality is that they are constructs based on choices on how costs are allocated to sectors. Choices which are often political. Choices which in the Beeching era were made to justify a frenzied application of the axe. Choices which in more modern times, during rail privatisation, were made to create a ‘profitable’ intercity network and a ‘how much do they cost!?’ regional rail network.

Once you summon up the courage and mental fortitude to cross the threshold of the intimidating edifice of the railway’s cost allocation system and into the cloistered world of railway economics that lies beyond it, the bias against regional railway which was built into the privatised system from the outset, becomes startlingly apparent.

Firstly, and obvious to the naked eye, is that by and large, cross subsidy within the passenger rail network was dismantled so that the regional railways that feed the intercity networks were separated out.  However, delving deeper this is compounded by a disproportionate and entirely unfair allocation to regional rail of both the overall costs of the railway, and of other rail sector’s costs.

This dumping of costs on the sector least able to afford them took place in a number of ways. Here are two of the most pernicious ways in which it was done. Inter-city trains are estimated to produce twenty times the track damage of a Pacer – yet they are allocated equal shares of maintenance and renewal costs. Infrastructure damage comparison diagram

Secondly, regional rail received only 18% of new investment by Network Rail but regional rail contributed 30% of fixed track access charges and was allocated of 32% of the financing costs. In other words regional rail is paying for track impacts and damages it didn’t cause, and paying for investment in the railways that it doesn’t benefit from.

And then there’s freight. I am all in favour of getting freight off the roads. I have no problem with railfreight not paying the full costs of its impact on rail infrastructure in order to achieve this end. I think the railfreight lobby has been determined and effective in fighting freight’s corner. A far better job than the regional rail lobby has done (though that in itself is not difficult as there isn’t one). Rail freight’s hard won status as a marginal user of the network is also another example of how cost allocation is less of a saintly practice of pure and spotless economic rationality than the consequence of politics and hard bargaining. I don’t have a problem with that either. But better to be honest about it.

If rail freight is a marginal user then there’s a strong, though slightly different, argument for regional rail to be a marginal user too. Regional rail takes traffic off the roads (benefitting remaining road users); gives commuters access to city centre jobs and opens up rural areas poorly served by road for inbound tourism and outbound access to opportunity. All of which benefit a host of wider Government objectives for growth, jobs and the environment. At the same time regional rail generally causes less damage to the infrastructure than other sectors, generates the least income, and requires the least fancy engineering. If it were to vanish tomorrow the majority of the bills of the railway would still need paying. Why on earth therefore should cash strapped regional rail be the one that always gets its, and other peoples’,  rounds in at the bar? And worse, ending up with the equivalent of a pint of dodgy mild whilst paying for others’ premium lagers and cocktails.

What happened to regional rail’s costs at the point of privatisation shows just how extreme the effect of this change in the way costs were allocated was – and what a construct are those cost per passenger kilometre, and subsidy figures by train operator or sector. Before privatisation the costs allocated to West Yorkshire’s rail network was £14 million, the minute after the new privatised cost allocation system came in (with the same trains and the same network) the costs increased to £43 million. For Centro the costs increased overnight from £33 million to £62 million.

All clever stuff then. All confirming London Government’s prejudices about the value of any service that doesn’t stop or start in London. All neatly positioning regional rail on the scaffold’s trapdoor whilst at the same time showing that rail privatisation created seemingly real inter city businesses that made real profits. All of this matters right now because these flawed subsidy figures are hanging over the re-franchising of the North’s railways. Right now the narrative feels like the future’s bright, the future’s rail. But really, just look at how much those regional railways cost and draw your own conclusions. We will do what we can for you but those figures speak for themselves.

But what would the figures look like under a fairer, more defensible and more rational system for allocating the railways costs?  If costs were allocated more in proportion to estimates of track wear and tear by different sectors? If overheads were allocated to prime users? If the track access charge payments that relate to infrastructure investment better reflected where that infrastructure investment was made?

Our report estimated that if that were the case then government support for regional networks would be more than a third lower than ORR currently states it is. Subsidy per passenger kilometre figures also change significantly. ORR’s figures of 22p per passenger kilometre for regional rail and 4p for InterCity becomes 17p for regional rail and 12p for intercity.Government funding estimates by market segment


What our figures show is that regional rail networks go from receiving more than half of all government funding to a share of just over a quarter. Regional rail passengers still receive the highest level of subsidy per passenger-km but it now becomes clear that this is driven by operating subsidy rather than infrastructure spending. Real subsidy levels are also shown to be much closer between Inter-City, London South East and Regional networks than previously thought.

The low level of infrastructure spending in regional networks also goes a long way towards explaining the high level of operating subsidy. Investment and the quality of infrastructure clearly play a key part in the ability of regional rail to attract passengers and thus generate additional revenue. Investment (or lack of it) is also a determining factor of train operating costs. For example, increasing train speeds can reduce costs, attract passengers while making future frequency enhancements cheaper to deliver. In that sense, it is not surprising that decades of underinvestment in regional rail infrastructure will lead to a widening gap in terms of subsidy requirements relative to other parts of the network.

It would take a relatively small increase in demand and yield (or, conversely, a fall in unit operating costs) to bring regional rail subsidy in line with subsidy on the rest of the network. This shouldn’t be hard to achieve given the relatively low mode share of rail in the regional market and the rampant growth observed following service improvements.

Overall the case for investing to save (rather than handwringing and penny pinching) on regional rail looks far stronger. More realistic numbers about where costs fall also tie in with the realities on the ground about regional rail which is that regional rail fits so well these days with how the North’s economy is developing. More people commuting longer distances to access high value jobs in city centres that can’t cope with much more road traffic; people taking to the train to avoid the hassle of driving and parking in the North’s many wondrous national parks and revitalised urban centres; and town and city economies that are starting to fuse and synergise. That’s why regional rail patronage has been soaring – even on routes where Whitehall lumbers is with Britain’s worst and oldest trains running at collective punishment frequencies.

A cost allocation system that is still playing out trace memories of Dr Beeching’s creative accounting, as part of a dusty Whitehall long game over regional rail now, looks as out of touch with what’s good for regional economies as communicating with tablets of stone.

Jonathan Bray

pteg Summary of the Autumn Statement 2013

Autumn Statement 2013 front coverWe thought we would share with you our summary of the key 2013 Autumn Statement announcements of relevance to transport and the PTEs.

Transport and local government budgets

  • For 2014-15, the majority of Whitehall departmental budgets will be cut by 1.1%.
  • Local government is excluded from this reduction, to help local authorities to freeze council tax in 2014-15 and 2015-16. As such CLG Local Government will see no reduction in its departmental resource budget for the next two years.
  • DfT will see a £41m cut in its resource budget for 2014-15 and £36m in 2015-16.
  • The Government is looking at giving local public services the same long-term indicative budgets as departments from the next Spending Review.

Local government

  • The government is inviting proposals for sales and better use of local authority assets as part of growth deals. As an incentive, the government will allow local authorities the flexibility to spend £200 million of receipts from new asset sales on the one-off costs of reforming services.
  • An additional £90 million over 3 years to improve the energy efficiency of public sector buildings.
  • £5 million during 2014-15 for a large scale electric vehicle-readiness programme for public sector fleets. The programme aims to promote the adoption of ultra low emission vehicles, demonstrating clear leadership by the public sector to encourage future wide-spread acceptance.
  • For more on the implications for local government, see the Local Government Association response to the Autumn Statement and the Guardian Local Leaders Network summary.



  • A new webpage on http://www.gov.uk, providing a single source of information on schemes designed to help manage the cost of transport to individuals and households.


  • A cap on the average increase in regulated rail fares for 2014 in line with RPI. Confirmation that the permitted ‘flex’ above the overall cap on average rail fares will be reduced to 2%. Read Campaign for Better Transport’s reaction.
  • Confirmation of a trial of flexible rail season ticketing in the South East to benefit those who work flexibly or part-time.

Motoring/road freight

  • Freeze fuel duty for the remainder of this Parliament.
  • To incentivise a shift to cleaner, cheaper fuel, commits to maintain the differential between the main rate of fuel duty and the rate for road fuel gases such as Liquefied Natural Gas (LNG) and Compressed Natural Gas (CNG) for 10 years. This aims to provide businesses with the certainty they need to invest in alternatively fuelled commercial vehicles.
  • Measures to encourage the development of driverless cars in the UK, including a review reporting by end 2014 and a prize fund of £10 million for a town or city to develop as a test site for consumer testing of driverless cars.
  • A guarantee for £8.8 million to help fund the installation of energy saving lighting equipment across a portfolio of NCP car parks.


  • The Government’s plans for National infrastructure are detailed in the National Infrastructure Plan 2013 (NIP 2013) published on the 4th December.
  • On the same day, the Government also published ‘The UK insurance growth action plan’ including a commitment by UK insurers to work with partners to deliver at least £25 billion of investment in UK infrastructure over the next 5 years, including but not restricted to projects in the published infrastructure pipeline.
  • Alongside NIP 2013 the government published the National Networks National Policy Statement for consultation and parliamentary scrutiny.
  • Launch of an overarching review of the Nationally Significant Infrastructure Planning Regime focusing on shortening the lengthy pre-application phase and further streamlining of the consenting process.
  • Creation of a £1 billion, 6-year programme to fund infrastructure to unlock new large housing sites (Manchester and Leeds were mentioned specifically). £50 million of this will be earmarked for Local Enterprise Partnership supported bids.
  • Maintenance of the Local Growth Fund at £2 billion in 2015-16 (including through making £110 million of Regional Growth Fund available for the Local Growth Fund). The Local Growth Fund will be at least £2 billion every year of the next Parliament.

Land-use planning

  • The government will take steps to address delays at every stage of the planning process, incentivise improved performance and reduce costs for developers, including consulting on measures to improve plan making, including introducing a statutory requirement to put a Local Plan in place.

More information

Rebecca Fuller

How well did transport really do in the Spending Review? The fine print analysed

c. Images_of Money on Flickr. Used under Creative Commons

A clearer picture on Spending Review outcomes is emerging, but important questions remain.

The 2013 Spending Round (commonly referred to as the ‘Spending Review’) announced a step change in infrastructure investment , backed by an impressive array of specific commitments .

But although the key transport capital budgets have emerged as obvious winners, the picture is less clear when it comes to some of Department for Transport’s (DfT) smaller grants.

At the same time, the unexpected decision to pool a substantial proportion of local transport capital funding into the Single Local Growth Fund (SLGF) makes the long term outcome uncertain.

A clearer picture is unlikely to emerge until the DfT clarifies its detailed spending plans for 2015 onwards and the results of the first SLGF competition emerge in the second half of 2014. The key points from the Spending Round are summarised below.

Treasury big picture:

  • The June Spending Round did not entail any net change in overall government spending relative to the March budget.
  • In reality, the annual year-on-year growth in total government capital spending between 2014-15 and 2017-18 will most likely fall below the rate of inflation.
  • The Spending Round did include some new capital funding commitments beyond 2018, with HS2 and the Highways Agency emerging as the big winners.
  • Although overall capital expenditure will be higher in 2014/15 than originally set out in the 2010 Comprehensive Spending Review (CSR), this will be at the expense of resource budgets, which will be 8.5% below original plans. This is of particular significance to local government funding, which has been the main source of savings.

DfT budget:

  • In 2015-16, the DfT’s budget will be 4.5% lower than in 2014-15 (as set out in the March 2013 budget).
  • Although DfT capital funding will increase by 6.7% (from £8.9 to £9.5 billion), its resource budget will go from £4.4 to £3.2 billion. The largest chunk of the saving will come from Transport for London’s (TfL) resource grant and assumed efficiency savings in Network Rail spending and DfT’s rolling stock procurement.
  • Our previous analysis of the 2010 CSR and subsequent budgetary announcements up to Autumn 2012 provides additional background information.

Local transport:

There will be a significant boost to key local transport capital grants in 2015-16:

  • +28% in real terms, relative to the 2014-15 budget
  • +16% in real terms relative to Labour’s 2010-11 budget

However, the unexpected decision to route a large proportion of local transport grants into Local Enterprise Partnerships (LEPs) via competitive growth deals makes it difficult to anticipate what proportion of this money will end up funding transport schemes in PTE areas.

The Spending Round said nothing about what will become of smaller competitive grants such as the Pinchpoint Fund, the Green Bus Fund, the Cycle Ambition Grant or the DfT’s contribution to the Regional Growth Fund. However, even if these were to be scrapped altogether, local transport capital funding would still increase by around 15% (in real terms) between 2014-15 and 2015-16.

On the revenue side, the current rate of Bus Service Operators Grant (BSOG) has been protected until 2015-16 and we also know that the DfT will manage a considerable Local Sustainable Transport Fund (LSTF) resource grant in 2015-16.

You can read our full analysis of the Spending Review on the pteg website.

Pedro Abrantes