Published 27th November 2012
The McNulty report produced in May last year, suggested that there were great savings to be made in the UK rail industry eventually reaching around three billion pounds a year.
The report created the Rail Delivery Group (RDG) made up with senior railway executives with the remit to investigate and eventually recommend the way forward to the Government. This work was somewhat inconvenienced by the West Coast Franchise award errors by the Department for Transport (DfT) last summer.
While the foregoing was in motion, the Office of the Rail Regulator (ORR) has been suggesting that tighter Regulation should be the way forward. This would be to improve standards via closer monitoring of franchisees and NR to improve performance for passenger and this is being somewhat publically resisted by the RDG.
As part of the Government prompted McNulty railway review, the ORR commissioned an investigation looking at franchised train operators’ performance in financial and punctuality terms over the last ten years. This created a league table but a true comparison is not possible given the different franchises operated. For example, punctuality is a function of infrastructure performance, external factors ranging between suicides to flooding. It must be remembered that staff and train reliability are under the franchisees’ control.
The age of the fleet operated and the routes covered also have a huge bearing on performance, for example the East Coast main line was electrified 30 years ago by British Rail on a very tight Government controlled budget so the minimum upgrade was provided. Performance has been poor on this route as more and more trains make the line harder to maintain reliably 30 years on.
The ORR has expressed the results in how much each passenger kilometre travelled costs but of course this figure is also dependent on how long a train is and its passenger capacity, how many passengers they can carry over what mileage.
For example, South West Trains operate long high capacity trains on an intensive commuter network while East Coast Trains operate long high speed trains and both have low passenger operating costs as a result.
Train companies that serve rural routes, such as Northern for example often carry very low numbers of passengers away from holiday periods over long mileages and consequently appear to have higher costs despite running short trains. Conversely, franchises like Merseyrail move vast amounts of passengers but as fares are often low as are distances travelled, the results can be misleading if not used properly.
This is the name of the 64 page report which compares for the first time the expenditure of the 19 franchised Train Operating Companies. It also shows how their costs and revenues have changed over time and how costs vary across franchises. It also looks at what makes up franchisee costs which accounted for 48% of total rail industry costs in 2010-11.
The study shows there has been strong growth in railway use - a 45% increase in passenger kilometres over the period and excluding the impact of subsidies paid to Network Rail, franchisees’ revenue now broadly matches their direct costs.
Also shown are differences in the costs incurred by each TOC, which also vary when measured in a range of ways (e.g. cost per passenger kilometre, per vehicle kilometre, per train kilometre and per train hour).
Inflation adjusted operator costs excluding access charges, increased by 35 per cent between 2000-01 and 2011-12. There was a 20 per cent increase in service levels (timetabled train kilometres) in this period, and overall real operating costs per train kilometre increased by 13 per cent, much less than the 35 per cent increase in total costs.
The analysis shows real revenue growth of 52 per cent between 2000-01 and 2011-12, with similar growth in passenger numbers. The rise in real income per passenger kilometre including the growth in service use was 4 per cent over the period.
The approach taken in this report provides a transparent analysis of costs using simple measures of unit costs, specifically costs per train, vehicle and passenger kilometre, and costs per train hour. Using these different measures allows us to put variation in costs between franchisees into greater context.
Train kilometres is the rail industry standard measure for volume of service provision. In comparison with train kilometres: using vehicle kilometres allows us to factor into account varying train lengths between franchisees, using train hours takes account of the variation in average speed between trains and using passenger kilometres allows us to put cost levels in the context of service usage (though it should be noted that passenger kilometres are not a significant cost driver in and of themselves).
Using these measures, the report shows that no individual franchisee is consistently above the average, and four have costs consistently on or below average for the first three measures. They are: East Midlands Trains, First Great Western, National Express East Anglia and South West Trains.
ORR cannot yet separate cost drivers between market characteristics, franchise specifications or management policies, this analysis should not be used to establish a “league table” of efficiency. Additionally, there are also links between costs and revenues not captured here - for example some operators may choose to spend more on marketing, customer service, or train quality to try to increase overall revenues.
The report says that average Rolling Stock costs make up 20% of a franchisee costs, staff costs, 28% and access charges to Network Rail plus Performance Regime charges, 25% of costs and ‘other’ costs total 27%.
The report contains a wealth of information and can be downloaded from the ORR website. The many charts are informative and useful in helping to understand the shape of the rail industry. This was exactly what the McNulty Report suggested was needed and so long as ORR and the RDG can agree a way forward, the Government will be well informed and able to act accordingly. This should allow everyone to reduce the £4billion subsidy required last year to run the railways.
The next tranche of EU legislation takes effect from 2015 and demands that accounts published by railway operators to include separate profit and loss accounts for passenger and freight services, showing separately public funds. They must also supply financial performance information to the regulatory body if asked and after this more legislation is likely to include further provisions on transparency and the compulsory competitive tender of franchises.