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ContentslistsavailableatScienceDirect

Accounting

Forum

j ourna l h o m e pa g e: w w w . e l s e v i e r . c o m / l o c a t e / a c c f o r

An

illusion

of

success:

The

consequences

of

British

rail

privatisation

Andrew

Bowman

a,b,∗

aResearchAssociate,ESRCCentreforResearchonSocio-CulturalChange(CRESC),TheUniversityofManchester,UnitedKingdom

bAndrewW.MellonPostdoctoralFellowSociety,WorkandDevelopmentInstitute,UniversityoftheWitwatersrand,SouthAfrica

a

r

t

i

c

l

e

i

n

f

o

Articlehistory:

Received7July2014

Receivedinrevisedform4October2014 Accepted7October2014

Availableonline14November2014

Keywords:

Rail Privatisation NetworkRail Subsidies

Trainoperatingcompanies Franchising

a

b

s

t

r

a

c

t

ThisarticleaccountsfortheBritishexperimentwithrailprivatisationandhowithasworked outeconomicallyandpolitically.Thefocusisnotsimplyonprofitabilityandpublicsubsidy, butontheappearanceswhichaccountingarrangementscreate.Thearticlescrutinisesthe NetworkRailsubsidyregime,whichenablestrainoperatorstoachievefictitious profitabil-itywithoutincreaseddirectstatesupport.Thisenablessupportersofprivatisationtoclaim trainoperatorsproduceanetgainfortheBritishtaxpayer.Theclaimformstheheartof atradenarrativewhichisemployedbytheindustryandtheirpoliticalbackerstodeflect criticismandstymyreform.

©2014ElsevierLtd.Allrightsreserved.

1. Introduction

ThisarticleaccountsfortheBritishexperimentwithrailprivatisationandhowithasworkedouteconomicallyand politically.Theobjectiveistocreateamorecomplexanalysisoftheconsequencesofrailprivatisationwhichfocusesnot simplyonlevelsofprofitabilityandpublicsubsidywithintherailsystem,butontheappearanceswhichthesefinancial arrangementscreate,andtheirpoliticalconsequences.Thestartingpointforthisanalysisisaparadoxbetweenstoriesof brilliantsuccessachievedbyprivatetrainoperatingcompanies(TOCs),andafinancialbackdropofaccumulatingpublic liabilitiesandcomplexstatesubsidyarrangements.

TwentyyearsaftertheRailwaysActof1993whichdismantledtheintegratedstatemonopoly,BritishRail,thepolitical sponsorsoftheprivatisedsystemareabletomake confidentclaimsaboutsuccessesachieved.TheConservativeParty TransportMinisterPatrickMcGloughlin,celebratedthetwentiethanniversaryofthefoundingoftheAssociationofTrain OperatingCompanies(ATOC)–thetradeassociationestablishedbyprivatepassengertrainoperatorsin1993–inJuly2013 withaspeechwhichheralded“20yearsofrisinginvestment[and]20yearsofextraordinarygrowthonourrailway”:

Andthinkbacktowherewestarted.Asajuniortransportministerinthe1980s,IrememberBritishRail. Underin-vestmentintracksandtrains.Poorreliability.Managerswhosegoodideasweretoooftenstifledbyalackofcash...

Andanageingnetworkinadecliningindustry.JohnMajor–thenthePrimeMinister–knewthingscouldbebetter. Sotonight,I’dliketopaytributetothepeoplewhogotitright.Andthosewhooverthepast20yearshavemadeit

∗ Permanentaddress:AndrewBowmanSociety,WorkandDevelopmentInstitute(SWOP),UniversityoftheWitwatersrand,Johannesburg,PrivateBag 3,Wits,2050,SouthAfrica.Tel.:+447921928077.

E-mailaddress:andrew.bowman5@gmail.com

http://dx.doi.org/10.1016/j.accfor.2014.10.001 0155-9982/©2014ElsevierLtd.Allrightsreserved.

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happen.Letmestartwithsomefacts.FormostofthetimesincetheSecondWorldWarrailtraffichasbeenfalling. Sinceprivatisation,journeyshavedoubled.Thenetworkisroughlythesamesizeas15yearsago.Butthereare4000 moreservicesaday...Thisisthesuccessofprivatisation.Icouldgoonreadingoutfigures(DepartmentforTransport,

2013).

TherhetoricalapproachemployedbyATOCisidentical: highlightingpastfailuresallegedlybroughtaboutbystate mismanagementandunder-financing,whileusingabarrageofstatisticstodemonstrate“theunprecedentedgrowthand stunningimprovements”sinceprivatisation(ATOC,2013).Particularemphasisisplacedonpassengerjourneynumbers, whichhaverisenatarateofjustunder4%per-yearfrom1997to2012.Thiscomparesfavourablytoa60yearaverageof 0.58%andiswellaheadofpassengergrowthfiguresachievedinFrance,GermanyandtheNetherlands(Ibid,p.16–20).These claimsconstituteaformof“imaginary”–adiscursiveconstructionofwhatasuccessfulprivatisedrailsystemshouldlook like–thatformsthecoreoftherailsector’stradenarrative.

Attemptstoactivelymanageperceptionsaboutacompany,asectororanationaleconomyhaveassumedanincreasing prominencein recentdecadesand coincidedwithanincreasedacademicfocusontheroleofeconomicdiscourse and narrativeinshapingeconomiclife(Miller&Rose,1990;Callon,1998;Froud,Johal,Leaver,&Williams,2006).Withinthisfield ofstudy,tradenarrativesarenotatechnicallanguageofexpertisebutsimpleandeasilyrepeatablestoriescreatedbyindustry associationsandlobbyinggroups,whichdifferacrosssectorsbutsharecommondevices.Tradenarrativesservetodefend sectoralinterestswithoutappearingtofavourtheinterestsofparticularcompanies.Theydosothroughstrongselective emphasisonpositiveattributeswhileoccludingorexplainingawaynegatives(Bowmanetal.,2013a,p.6).Whensuccessful, tradenarrativesventriloquisejournalistsandfront-benchpoliticians,creatinganecho-chamberwheredecontextualised statisticsandsupportiveassertionsrepeatthemselvestoframepublicdebate.PerhapsthemostprominentcaseinBritish publiclifeoftradenarrativeinpractisehasbeenthefinancialservicesindustry.LobbyistsforandsupportersofLondon financeinthepre-crisisperiodpushedanarrativewhichexplainedthebeneficenceoffinancialinnovationandtheneed forlighttouchregulationwhichwasendlesslyrepeatedandpoliticallyendorsed.Inthepost-crisisperiodtheCity’strade narrativeswitchedtoemphasiseitstaxandemploymentcontributioninordertowardoffreform(Froud,Nilsson,Moran,

&Williams,2012).Inthecaseofrail,thetradenarrativehasattemptedtocounteractcriticismsofprivatisationthrough

selectiveemphasisofspecificperformancemetricswhichendorseclaimsofsuccess,specificallyrisingpassengernumbers, fallingdirectpublicsubsidyandslimnetprofitmargins(Bowmanetal.,2013a).However,iftheframingofeconomicdata istheprocessbywhichatradenarrativeiscorroborated,itisalsotheareainwhichitisvulnerableandcanbeundermined byevents.

Incaseofrail,thetradenarrativeisparticularlyvulnerablebecausewhiledataonpassengernumberssupportsonestory ofsuccessdeliveredbyprivateenterprise,theaccountsofNetworkRail–thecompanyresponsibleforrailwayinfrastructure afterthecollapseofRailtrackPLCin2001–telladifferentstoryaboutstatesubventionfortherailwaysystemonaneven greaterscalethanunderBritishRail.McGloughlin’sspeechandATOC’sflagshipreportreleasedthesamemonth(ATOC,2013) donotmentionthesignificantgrowthinthedebtburdenshoulderedbyNetworkRailtofundinfrastructureimprovements– fromjustunder

£

9636min2002/2003(NetworkRail’sfirstfullyearofoperations),to

£

30,358masofMarch2012(Network

Rail,2003,2013).Overthisperiod,theannualcostofinterestpaymentsonthisdebtfinancingincreasedalmostsevenfoldto

justunder

£

1.4bnin2012,surpassingspendingontrackmaintenancewhichfellbelow

£

1bnthatsameyear(Ibid,Network

Rail,2012).

Whilenominallya‘private’companyNetworkRail’sfinancialviabilityhasdependedongovernmentguaranteesto under-writeitsbonds.ThishadtheimpactofreducingborrowingcostsbecauseNetworkRailwasessentiallyabletoborrowatarisk freeratewithGovernmentguarantees.Moreover,alongsidethegroupofcompaniesthatmakeupBritain’sprivatisedrail transportationsystem,NetworkRailhasalsoreceivedsignificantadditionalstatesubsidies(Ibid,Jupe,2009).Inrecognition ofthis,theOfficeforNationalStatistics(ONS)issuedanannouncementinDecember2013statingthatNetworkRailwould bereclassifiedasa“CentralGovernmentbody”.Thishastheeffectofbringingover

£

30bnofadditionaldebtontothe gov-ernmentbalancesheet(Joloza,2013).TheONS’sdecisionwasrequiredtobringtheUK’snationalaccountingsystemsinline withtherestofEurope.However,theimplicationsfortheUKrailsectorareprofound,raisingquestionsaboutwhetherthe railsystemcanbeconsideredprivatisedinanymeaningfulsense.Indeed,inApril2014,theDebtManagementOffice–the TreasuryagencyresponsibleformanagingcashanddebtonbehalfoftheUKgovernment–wentastepfurther.Itannounced that:“Governmenthasnowdeterminedthat,infuture,valueformoneyforthetaxpayerwillbestbesecuredbyNetwork RailborrowingdirectlyfromtheGovernment,ratherthanbyNetworkRailissuingdebtinitsownname”(DebtManagement

Office,2014,p.1).ThiseffectivelyendeddirectprivatesectorinvolvementinfinancingBritain’srailinfrastructure.

Thisarticlequestionswhatisgoingonhereeconomicallyandpolitically.Fromaneconomicandfinancialperspective, muchappearstohavegonewrongwithrailprivatisation.However,thepoliticalnarrativesfromthesectorandsenior politiciansareaboutprivatisationworkingwellanddeliveringonitspromises.Thisarticleemploysaccountingnumbers tocritiquethepoliticalrhetoricsurroundingtheprivatisationofBritain’srailways.Tobeginwith,thearticleargues,itis necessarytounderstandthatrailprivatisation,isamessbornoutofeffortstorelievelong-termproblemswithcostrecovery andunder-funding.Asthesubsequentanalysisexplains,thiseconomicconfusionalsohaspoliticalconsequences.

Thefirstsectionofthearticletakesahistoricalperspectiveonrailwayfinancesundernationalisedandprivateownership, highlighting,inGourvish’sterms(2002,p.2),the“deep-seatedconfusionaboutwhattherailwayswereactuallysupposedto achieveinamixedeconomy”.Privatisationintheearly1990swasintendedtosecurefinancialsustainabilitythroughprivate

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investmentandincreasedoperatingefficiency,butthereformsignoredhistoricalproblemswithacapitalintensiveindustry wherepassengerfarerevenuewasrarelysufficienttorecoverthecostsofinvestment(Shaoul,2007).Thesecondsectionof thearticleshowsthatthiscontradictionwasplayedoutthroughthefinancingofrailinfrastructure.Afterthe2001financial collapse ofRailtrack,thePLCresponsibleforrailinfrastructure fromprivatisationin1994,NetworkRail,itssuccessor, wasestablishedtoincreasestate-supportedinfrastructurewhilemaintainingprivateownership(Whitehouse,2003;Jupe,

2009a).AnoutcomeofthehurriedpolicymakingprocessleadingtotheestablishmentofNetworkRailwasare-worked

subsidysystemthathasenabledtrainoperatingcompanies(TOCs),whichrunpassengerfranchiseservicesallocatedthrough competitivebiddingprocesses,toachievefictitiousprofitabilitywithoutincreaseddirectstatesubsidy.Theincreasedpublic subsidychannelledthroughNetworkRailenabledtrackaccesscharges(TACs)(thesinglemajoroperatingrevenuesourcefor RailtrackandNetworkRail,paidbytheTOCs)tobeloweredalongsideamassiveprogrammeofupgradesandmaintenance. Severalotherstudieshavenotedtheextenttowhichprofit-makingintheUK’sprivatisedrailsystemhasbeendependent onvariousformsofpublicsubsidy(e.g.Jupe,2009;Shaoul,2006;Stittle,2002;Taylor&Slomann,2012).Thispaperattempts tobuildonthesestudiesinthethirdsectionfirstbypresentingadditionaldatawhichdemonstratestheheavyindirectsubsidy totheTOCsviaNetworkRail,andsecondlybydevelopinganewlineofanalysisonthesignificanceofthesefundingflows forthepoliticsofprivatisedrail—specifically,thattheyfacilitateatradenarrativeaboutoperatingsuccessesandallow supportersofrailprivatisationtoclaimthatTOCsproduceanetgainforthetaxpayer.Asthefinalsectionofthepaper argues,thetradenarrativeislentcredibilityandsupportbyseniorpoliticiansbecausethebackersofrailprivatisationare co-dependentuponthetrainoperatorsinupholdingtheappearanceofsuccessdeliveredbyprivateenterprise.

2. Thecontradictionsofrailprivatisation:Promisesandhistoricalrealities

SincethebirthoftheBritishrailwaynetworkintheUKinthemid-19thcentury,mattersofaccess,ownership,and standardshavebeenasourceofrecurringcontroversy,buttheunderlyingdriverofperiodicreformoverthepast50has beentheissueofcosts:howtomeettheexpenseofacapitalintensiveindustrywhichproducesdiffusesocialandeconomic benefits,butcannotrecovercostsfrompassengerswithoutpricingmuchofthepopulationofftherailways.Thelogicof nationalisationin1945wasthatBritishRail,aswithotherstrategicnationalisedindustries,wouldprovideacheapservice fortherestoftheproductiveeconomy,withoperatinglossestoleratedbecauseprofitwasnotaprivilegedindicatorof performance.

ThislogicneversateasilywiththeTreasury.Afterhavingpeakedin1952,post-warrailoperatingsurplusesvanished(Loft,

2001,pp.72–73).In1956,thenewTransportMinister,HaroldWatkinson,insympathywiththeTreasuryview,pledged

to‘turntherailwaysawayfrombeingjustanothernationalisedindustryintoanorganisationthatfunctionsonnormal andsensiblebusinesslines’(Ibid,p.76).The1961WhitePaper,TheEconomicandFinancialObligationsoftheNationalised Industries,introducedfinancialtargetsforstateownedenterprises(Chick,2002,p.135–137),andwithinthisframerailways werenotautilityprovidingcheapservicesbutanuneconomicindustrychargingartificialprices(Loft,2001,p.86).The Beechingcutsof1963–5closed2363stationsand266services–roughlyonethirdoftherailnetwork–andwereadrastic attempttoshapetherailnetworkaroundcostrecoveryandreducedlosses.AsBeeching’sreport,TheReshapingofBritish Railways,stated:

Therailwaysemergedfromthewaratafairlyhighlevelofactivity,butinapoorphysicalstate.Theywereableto paytheirway,becauseroadtransportfacilitieswerestilllimited,andtheycontinuedtodosountil1952.Fromthen onwards,however,thesurplusonoperatingaccountdeclinedprogressively.After1953itbecametoosmalltomeet capitalcharges,after1955itdisappeared,andbyI960theannuallossonoperatingaccounthadrisento

£

67m(British

RailwaysBoard,1963,p.3).

BritishRail’slossesprovedastubbornproblembecausesuccessivegovernments’promotionofmotorwayscutpassenger numbersandincreasedBritishraildeficitsintheearly1970s.The1974RailwaysActimposedtargetsaimedatstabilising statesubsidywhilerestrictingexternalfinancing(Gourvish,1990,pp.120–121).AfurtherWhitePaperontheNationalised Industriesin1978pavedthewayforstricterfinancialtargetsandmorecomplexperformanceindicators,producingwhat PeterParker,thenBritishRailchairman,describedasastateof‘perpetualaudit’(Gourvish,2002,p.44).Thesesuccessive reformeffortsobscuredwhatGourvish(2002)describesas:

...[D]eep-seatedconfusionaboutwhattherailwayswereactuallysupposedtoachieveinamixedeconomy...from thebeginningthepoliticiansattemptedtoproduceanentitywhichcouldcombinepublicserviceaspirationsand commercialviability,butafter25years’experiencethissearchwassomethingofaHolyGrail.(Gourvish,2002,p.2) TheThatchergovernmentintensifiedcommercialpressures.Targetsforsubsidyreductionsamountedinrealtermsto a25%cutbetween1983and1986(Ibid,p.122).However,inaperiodofstrongeconomicgrowthinthemid-1980s,all threepassengerbusinessesincreasedtheirincomes,withanaggregategrowthinrealpassengerincomeof36%between

1983and1989(Gourvish,1990,p.130).Bytheearly1990sthenetworkwasinvestment-starvedbuteffectiveatcontrolling

costs.In1989,BritishRailwasrecordedasbeing40%moreefficientthaneightcomparablerailsystemsinEuropeusedas benchmarks,whereasin1979,itwasnomorethan14%moreefficient(Ibid:149).

Inthehurrytoimplementprivatisationinthe1990s,thegovernmentdidnotacknowledgetherailways’long-term problemsaboutrecoveringcostsfromfares.The1993RailwaysActintroducedadisintegrated,tripartitestructure:astock

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63.0 72.6 80.2 70.6 63.3 57.2 49.8 57.4 56.1 84.7 70.9 60.7 66.1 70.473.8 66.0 58.6 51.8 52.3 49.4 44.3 51.253.7 57.4 62.765.1 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 198 6/ 87 198 7/ 88 198 8/ 89 198 9/ 90 199 0/ 91 199 1/ 92 199 2/ 93 199 3/ 94 199 4/ 95 199 5/ 96 199 6/ 97 199 7/ 98 199 8/ 99 199 9/ 00 200 0/ 01 200 1/ 02 200 2/ 03 200 3/ 04 200 4/ 05 200 5/ 06 200 6/ 07 200 7/ 08 200 8/ 09 200 9/ 10 201 0/ 11 201 1/ 12 %

Fig.1.Passengerrevenueasapercentageoftotalrailsystemrevenue.Sources:OfficeforRailregulator(ORR)andSN/SG/617,HouseofCommonsNote:Total

passengerrailfaresasashareoftotalrevenuesreceived.

marketlistedPLC(Railtrack)responsibleforinfrastructure,trainoperatingcompanies(TOCs)biddingforfranchisestorun passengerservices,withrollingstock(enginesandcarriages)leasedfromrollingstockoperatingcompanies(ROSCOs).The July1992WhitePaper,NewOpportunitiesfortheRailways,justifiedthesystemwithaseriesofassumptionsandpromises whichstillformthebasisfortheimaginaryofsuccessfulrailprivatisation(SecretaryofStateforTransport,1992).Alongside expectationsof‘lessscopeandjustificationforgovernmentinvolvement’;‘Clearandenforceablequalitystandards’;‘greater opportunitiestocutoutwasteandotherwisereducecosts,withoutsacrificingquality’,theprincipleclaimwasthatprivatised railwayswouldattractlarge-scaleprivateinvestment,allowingmodernisationofakindwhichBritishRailcouldnever manage(Ibid).AsShaoul(2007)noted,thisimaginaryignoredthe:

...[P]articularcircumstancesofacapitalintensiveindustrysuchastherailways.Thesourceoftheproblemwas notsimplycompetition,regulationoritslack,butmoreimportantlytheinsufficientsurpluscreatedbytheindustry relativetotheamountofcapitalinvestedintheindustry,tomeetalltheclaimsconsequentuponprivatization.(Shaoul,

2007,p.211)

ThePrimeMinisteratthetime,JohnMajor,didnotdiscussrailprivatisationinhisautobiographybutwhenaskedin2008 tojustifythepolicyhisonlypositiveargumentwasthatrailprivatisationwoulddrawininvestmentbecause‘inthefuture –asinthepast–noGovernmentwouldeverprovidetherailwayswithadequatefunding’(:Loc:6594).Suchexpectations haveprovenmisguided.Publicfundingdidnotdisappear,butratherincreasedtobeconsistentlyhigherinrealtermsinthe 2000sthaninthedecadebeforeprivatisation,from

£

3718min1992/1993tonearly

£

7415min2006/2007(AppendixA).

Fig.1alsoprovidesalongtermviewonthepercentageoftotalrailsystemrevenueaccountedforbypassengerrevenue—that is,therevenueearnedfromtherailcompaniesfromtheiroperatingactivities.Inthe25yearscoveredbytheavailabledata, itissignificanttonotethatpassengerrevenueneveraccountedformorethan85%oftotalrailrevenue(AppendixA)and averagedjust60percentoftotalincomeduringthisperiod(seeTable1).

TheBritishrailnetworkhasneveratanypointinrecenthistorymanagedtocoveritscostsfrompassengerfares. Gov-ernmentinrecentyearshasreportedlysetatargetofrecovering75%ofcostsfrompassengers,afigureachievedonlyonce sinceprivatisation(BBC,2013).Ticketpricesunderbothpublicandprivateownershiphavebeensubjecttoregulationin anefforttobalancepublicaccessibilitywithfinancialobjectives,andbringingfarerevenuesinlinewithcostswouldrisk

Table1

Realpassengerrevenuesandgovernmentgrants.

Years Totalpassenger revenue

Totalstatesupporttotherailindustry incPTEgrants(excludingfreight)

Totalpassengerrevenue andtotalstategrants

Passengerrevenueasashareof passengerrevenueandtotalstategrants

£bn £bn £bn %

1986to2012 125 85 209 60

Sources:ORRandSN/SG/617,HouseofCommons.Notes:Subsidy:2001/02–2003/2004includes£3.520bngovernmentgrantsdirectlytoRailtrack/Network RailandLondon&ContinentalRailways.Includingnon-franchisedpassengerrevenue(£36.7in2009/2010and£45.5in2010/2011)Passengerrevenue includesallticketrevenue.

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jeopardisingtheformerobjective.Underpublicownership,thisgapbetweenpassengerrevenueandtotalrevenueindicated managementfailure.Underprivateownershipthematterhasbeenmorecomplex.Whiletheprivatisedrailsystemhas generatedanumberofprofitablepositionsforcompanieswithinit,thishasultimatelyrelieduponthecostofinfrastructure beingpassedtothestate.

2.1. Reconfiguringrailsubsidies:Railtrack,NetworkRailand‘FixingtheFinances’

Theproblemswithcostrecoveryandinfrastructurefinancingunderprivatisationhavebeenmetwithaseriesofbodges andfixesrelatingtotheflowofstatesubsidyaroundtherailsystem.Theoriginal1992WhitePaperonrailprivatisation recommendedrailinfrastructureshouldremainpubliclyownedbecausetherewasnohistoricalrecordofprofitability. However,theexpectationwasthatprivatesectormanagementexpertisecoupledwithcapitalmarketdisciplinescould financiallytransformsomeaspectsoftherailsystem,andthedecisionwasmadetoprivatiseRailtrack,whichwasformedin April1994andfloatedtwoyearslaterinMay1996.Railtrack’ssourceofincomewastheTrackAccessCharges(TACs)levied ontheTOCs.TheseweresetbytheOfficeoftheRailRegulator(reformedandrenamedastheOfficeofRailRegulationfrom July2004)forfiveyearControlPeriods.ThechargesweredeterminedbytheRegulatortocoveroperatingcosts,subjectto efficiencysavings,currentcostdepreciation,andprovideastablereturnoncapitaloveraRegulatedAssetBasesufficientto persuadeshareholdersofthemeritsofnewinvestment(Stittle,2002,pp.150–151;Jupe,2009,p.183).Priorto2000,itwas expectedthatTACswouldenableRailtracktorunwithoutapublicsubsidy.However,TOCswerenotabletomeetthecostof thechargesthroughpassengerrevenues,andsotheywereunderwrittenbystatesupportwhichpeakedat

£

2.5bnin1997 (thefirstfullyearunderafullyprivatisedsystem),butremainedover

£

1bnby2001(seeAppendixB).Thisdirectsubsidyfor theTOCswasalsothereforeanindirectsubsidyforRailtrack,whichwasabletodistributeregulardividendstoshareholders throughthe1990s(Jupe,2007,p.149).Indeed,duringRailtrack’sexistencebetween1994/1995and2001/2002,subsidiesto theTOCsaveraged92%ofthevalueofRailtrack’sTACrevenue(AppendixB).After2000,theregulatoraddeddirectsubsidies toRailtrack’srevenuemix(Crompton&Jupe,2007,p.911).

TheflawsintheRailtrackbusinessmodelwereexposedbyasuccessionoffatalrailaccidentsatSouthallin1997,Ladbroke Grovein1999,Hatfieldin2000,andPotter’sBarin2002.Subsequentofficialinquiriesexposedseriousunderinvestmentin trackandsignalling,andanaggressiveoutsourcingstrategywhichraisedthereal-termscostsofnewinvestmentprojects to2–3timesthelevelspaidbyBritishRail(NationalAuditOffice,2000;Crompton&Jupe,2007,p.910;Jupe,2007,p.150). Thecomplexitycreatedbytheseoutsourcingarrangements,theabsenceofaBritishRail-styleassetregister,andthelossof experiencedseniorstaffinthecost-cuttingdrive,meantRailtrackwasunabletoprovideconcreteassurancesoverthesafety oftherailnetwork.Reducedspeedlimitswereimposedaroundthecountry,incurringfinesforRailtrackascompensationto TOCs,pushingpassengerstootherformsoftransportandcausinganindustry-widefinancialcrisis(Crompton&Jupe,2007,

p.914;Jupe,2007,p.150).Combinedwithrecognitionofthescaleofspendingrequiredtoreplaceandrenewinfrastructure,

thesefinancialstrainsledgovernmenttointervene.Thesharpriseinstatesubsidyfrom2001inFig.1reflectstheextentto whichthestatetookonresponsibilityforfundingtheurgentinfrastructuretrackandreplacements.In2001,itsfinalfullyear ofoperation,Railtracksecureda

£

1.5bngovernmentgrantandproposedpayingshareholders

£

138mindividendswhile makingapre-taxlossof

£

534m(RailtrackGroupPLC,2001).

TheNewLabourgovernmentdecidedinlate2001,afterfurtherrequestsfromRailtrackforfinancialsupport,that fun-damentalreformwasrequired.However,itshiedawayfromitspre-1997electionpromisetorenationalisetherailways. HavingputRailtrackintoadministrationinOctober2001,itinsteadtookaThirdWay-inspireddecisiontocreate,inOctober 2002,anew“not-for-dividend”infrastructurecompany,NetworkRail(Whitehouse,2003).Inlegalterms,thecompanywas privateand‘owned’bymembers(drawnfromindustryandotherstakeholderorganisations)whowereintendedtoactlike shareholders(Jupe,2007,p.253).However,governmentcouldappointadirector,andexertcontrolthroughregulation,with theOfficeforRailRegulation(ORR’s)targetsforControlPeriodsagreedbytheTransportMinister,andfinancialsupport(Ibid, p.254).Ratherthansourcingcapitalfromequitymarkets,NetworkRailwastoissuebondswithrepaymentguaranteedby theTreasury,makingitsfinancingcostssimilartothoseofgiltyields.Despitethisarrangementitsdebtappeared,until2014, asaprivatesectorliabilityratherthaninthepublicsectordebtfiguresinthenationalaccounts.TheONSinitiallyaccepted theargumentthatitwasacontingentliabilityforgovernmentthatwasunlikelytobecalled(Crompton&Jupe,2007,p.914). Themattercausedconsiderabledisagreementthough,withtheNationalAuditOfficearguingthedebtshouldbeformally consideredapublicliability(McCartney&Stittle,2006,p.149).

TheformationofNetworkRailbroughtwithitincreasedcommitmentsforpublicfundingoftherailways.AstheORR

explained(2003,p.7):

...theRegulatorhasconcludedthatitisappropriatetoallowforNetworkRailtospendsignificantlymorethan heallowedRailtrackinhisOctober2000accesschargesreview,becausethiswillenableNetworkRailsafelyand effectivelytotacklethelegacyitinheritedfromRailtrack:alegacyofpoorplanningandprojectdelivery;inadequate arrangementsformanagingsuppliersandsubcontractors;inadequatelevelsofmaintenanceandrenewalactivity; poorcustomerfocus;andaninsufficientgraspofthecausesofandcuresforpoorday-to-dayperformance.

In2004theORRsanctionedariseof50%infundingforthe2004–2009controlperiod(Jupe,2009,p.194).Alongsidethe debtguarantee,whichloweredborrowingcostsandenabledarapidexpansioninbalancesheetcapitalisation,thegrowth inNetworkRailspendingwasfurtherinflatedbythecommencementofmajorannualgrantstoNetworkRail(seeFig.2).

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Fig.2.RailtrackandNetworkRailshareofincomebytype1994–2012.Source:RailtrackandNetworkRailannualreportandaccounts,variousyears.Notes: Grantsincludesdeferredgrantsandincentiveadjustments.

Thesegrantsweremadeallthemoreimportantbythefactthat,inrealterms,incomefromregulatedTACsfellintheyears aftertheestablishmentofNetworkRail,despiteagrowthinpassengerkilometrestravelled(seeAppendixC).Academic discussionofNetworkRailhasfocusedonthequantitativeimpactofthispolicydecisiononrailwayfinancingleading,asit did,tomajorincreasesinpublicrailexpenditure.Equallysignificant,thispaperargues,istheimpactithadonperceptionsof railwayfinancingandtheroleofpublicsubsidythereof.InreroutingthebulkofdirectsubsidyawayfromtheTOCsandinto NetworkRail,whilereducingtheburdenofTACs,theappearanceofrailwayfinancialswasradicallyaltered.Whilegrants totheTOCspre-2001hadformedavitalindirectsubsidyforRailtrackprofits,post-2002thissituationwasreversedsothat governmentgrantstoNetworkRailbecameanindirectsubsidyfortheTOCs.Essentially,thisfixallowedtheprivatesector TOCstoappearmoreprofitableandlessburdensometothetaxpayer.

ThisfinancialarrangementinturnenabledtheTOCstoconstructnarrativesextollingthebenefitsofrailprivatisationand reinforcingclaimslaidoutinthe1992WhitePaper.TheargumentofthispaperisthereforethattheTOCshavecapitalised onaseriesofhaphazardaccountingfixesthathaveinadvertentlyservedapoliticalrhetoric.Thetilttowardsaheavier relianceontheNetworkGrantandpublicly-guaranteeddebt,andalesserrelianceonTACs,wastheoutcomeofaprocess whichbeganwiththeRailRegulator’s2000PeriodicReview,andendedwiththesubsequentimplementationofanew chargingregimefrom2004.TheproposalscreatedbyNetworkRailandtheORRin2003attheendofthePeriodicReview’s consultationprocessrecommendedscalingdowngovernmentsubsidiesandsubstantiallyraisingTACs.AssetoutinTable2, trackaccesschargerevenueundertheproposalswouldriseto

£

4.1billionasothergrantswerediscontinued,becomingthe solesourceofrevenueforNetworkRailaswasoriginallyintendedforRailtrack(ORR,2003a).Thetargetof

£

3164mfrom TACsin2004/2005wasmorethandoublethe

£

1256achievedin2001/2002and

£

1356in2002/2003.

Thesetargetsweretheoutcomeof15monthsofanalysisandconsultation,but10daysbeforetheORRwasduetopublish them,theDepartmentforTransportinformedthemthat‘foraccountingreasonsitwouldbedesirablefortheStrategicRail Authority(SRA)[thenon-departmentalplanningandregulatoryagencyestablishedbytheTransportAct2000andabolished in2005]infuturetoincreasetheamountofmoneythatitpaysingranttoNetworkRailallowingaccesschargestobeset atalowerlevel’(ORR,2003a,p.11).Theaccountingrationalewascomplex.TOCscouldclaimsupportfromtheSRAtopay

Table2

ProposedNetworkRailrevenueprofile(£m).

Expectedtrackaccesscharges(TAC)revenue GrantsfromtheStrategicRailAuthority(SRA) TotalNetworkRailrevenue

£m £m £m 2004/2005 3164 1279 4443 2005/2006 3759 652 4411 2006/2007 3690 552 4242 2007/2008 4199 0 4199 2008/2009 4137 0 4137 Source:ORR.

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forincreasesinTACsintroducedatnewfiveyearcontrolperiodsthatwerenotintheirfranchiseagreements.However,the SRApreferredtopaygrantstoNetworkRailratherthantheTOCs,astheORRexplained:

[T]heDfTandtheSRAexplainedthatallowingtheSRAtopaymoredirectlytoNetworkRailingrantwouldreduce thepressureontheSRA’soverallfranchisesupportbudgetatatimewhenthecosttotheSRAofsubsidiespaidto franchiseholdershadalreadyrisensharplyandwaslikelytocausetheSRAtoincurexpenditurebeyondthatwhich hasbeenallocatedtoit(Ibid,p.11).

TheotherreasongivenforchannellingpublicfundingthroughNetworkRailwasthatitwouldbecountedascapitalrather thancurrentexpenditure,akeyconsiderationgiventhen-ChancellorGordonBrown’sprofessedfocusonfiscalprudenceas acentralplankofeconomicpolicy(Brown,2001).AstheORRexplained:

TheaccountingrulesthatgovernmentsthroughouttheEuropeanUnionmustadhereto,donotallowgrantstothe privatesectortobeaccountedforascapitalformation,unlesspaiddirectlytotheprivatesectorentityundertaking thecapitalformation.Therefore,suchgrantscannotberoutedthroughtheTOCs(ORR,2008,p.328).

Thethen-transportsecretaryAlistairDarlingarguedtotheHouseofCommonsthatthegovernment’sfiscalrules prohib-iteditfromborrowingtofundcurrentexpenditure,whichitwouldbedoingifitgavesubsidiestotheTOCstocoverhigher TACs.ThesolutionwastoensuresubsidytoNetworkRaildidnotexceeditscapitalinvestment(renewalsand enhance-ments),whileitsincomefromsales(TACs)neededtocover50%ofitsproductioncosts(operationsandmaintenance,plus depreciation)(ORR,2003b).CapitalgrantstoNetworkRailwouldtherebynotberecordedascurrentexpenditurebythe

ONS(HouseofCommons,2003,122–124).Fig.2displaysthefinancialoutcomesofthetransitionfromRailtracktoNetwork

Rail.Whereastheformerhadbeen85%financedbyTACs,NetworkRailhasreceivedonlyaroundonequartertoonethirdof itsincomefromthissource.Thebalancecomesprincipallyfromgovernmentgrants,whichin2011/12amountedtonearly

£

4bn.

3. Fixingprofitsandmanagingappearances

McCartneyandStittle(2006,p.150)concludeoverthecreationofNetworkRail,“Thesuspicionmustbethattheunusual,

ifnotuniquestructureofNetworkRailisaresult,notonlyofsomeidéefixeaboutthepoliticalimplicationsofextendingstate ownershipbutalsoconcernfortheeconomicreportingimplications.”Politicallysponsoredreformscoupledwith oppor-tunisticaccountingenabledadramaticgrowthindebtfinancingforrailinfrastructurewithoutacommensurateincreasein reportedgovernmentindebtedness.ThisallcametoanendwiththeONS’s2013decisiontobringNetworkRaildebtonto thepublicsectorbalancesheet(Joloza,2013;DebtManagementOffice,2014).However,asthissectionargues,NetworkRail hascontinuingpoliticalrelevanceinalteringthefinancialappearanceofprivatisedrailinamannerwhichsupportsthetrade narrativesofTOCs.ThisisdonebyartificiallyinflatingTOCprofitsinamannerwhichenablesthemtomakelargerfranchise paymentsbacktothetaxpayer.This,inturn,providestheTOCswithanimportantrhetoricalopportunitynotonlyintermsof defendingtheirprofitablenichewithinaloss-makingindustrybutalsoinmaintainingtheimaginaryofprivatisationamong politicalbackersofthepolicy.

Asmentioned,akeypromiseofrailprivatisationwastheeliminationofpublicsubsidyfollowedbyanetgainforthe taxpayerintheformoffranchisepaymentsleviedontheTOCsastatethatwasexpectedtobeachievedby2005/2006(Shaoul,

2006,p.152;Jupe,2009,p.188).UndertheNetworkRailregime,TACswereloweredaspassengerjourneysincreasedand

ticketpricesroseabovetherateofinflation.ThisimprovedthefortunesoftheTOCstotheextentthattheDepartmentfor Transportbecameanetbeneficiaryofrailfranchisingin2011/2012.AsFig.3shows,netsubsidytoTOCstransformedfrom over

£

1bnattheformationofNetworkRailin2001/2002toasmallnetgainforgovernmentfrom2011onwardsasfranchise paymentsmadebyTOCsexceededdirectsubsidies.Thishashowevercoincidedwithlargeincreaseindirectstatesubsidy fortheinfrastructurecompany.Thus,whilesubsidytotheTOCsasapercentageofpassengerrevenuehasfallenthedirect subsidytoNetworkRailhasremainedequaltoaround50%ofpassengerrevenue(seealsoAppendixB).

DuringthefirstdecadeofNetworkRail’sexistence,passengerkilometrestravelledincreasedbysome43%,while pas-sengerfarerevenuefortheTOCsincreasedby48%;meanwhile,NetworkRail’srevenuefromTACs,adjustedforinflation, declined12%from

£

1.8bnto

£

1.6bn.Theeffectsofthissystemofindirectsubsidyonthefinancialperformanceofindividual TOCsisillustratedbyfiguresreleasedbytheDepartmentforTransport(2012)showninTable3.Excludingtheeffectsofthe NetworkGranttoNetworkRail,onlyeightof18franchisesreceivedanetdirectsubsidyduringtheyearwherebysubsidies exceededfranchisepremiumpayments.However,whenincludingtheNetworkGrantforthe16franchisesforwhichthe DfTliststhevalueinpencepermile1,15arenetrecipientsofgovernmentsubsidy.

ThelevelsofstatesupportfortheTOCsarehowevergreaterthantheyappearinTable3becausealongsidetheNetwork Grant,NetworkRailhasaugmenteditsoperatingincomebyissuingbondsinthecapitalmarketwithgovernmentguarantees. Theresult,intermsofcapitalstructure,wasamajorshifttowardsdebtfinancing.Railtrackwasneverlessthan50%equity financedbecauseitcouldnotissuelargeamountsofinvestmentgradepaper.NetworkRailhoweverhasbeennearly80%

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Fig.3.NetworkRailandTOCsubsidy,1995–2012.Source:ORR,NetworkRailAnnualReportsandAccounts.Notes:NetworkRailsubsidyincludesgrants deferredgrantsandincentiveadjustments.SubsidytoTOCsincludesgrants,franchisepaymentsandperformancereceipts.

Table3

GovernmentdirectandindirectsubsidyforcurrentUKrailfranchises2011/2012.

Netfranchise payments Netrevenue support Totaldirect government subsidytoTOCs Indirectgovernment subsidyviaNetwork Railgrants

Totaldirectand indirectgovernment subsidya

Pencepermile Pencepermile Pencepermile Pencepermile Pencepermile

ArrivaTrainsWales n/a n/a 19 n/a n/a

C2C −2 0 −2 7 5

ChilternRailways 1 0 1 12.4 13.5

CrossCountry −0.6 0.9 0.3 14.7 15

EastCoast −6.2 0 −6.2 6.6 0.5

EastMidlandsTrains −4.8 1.9 −3 13.7 10.8

FirstCapitalConnect −9.1 1.5 −7.6 5.4 −2.2

FirstGreatWestern −8.8 5.8 −3 8.8 5.8

FirstScotrail n/a n/a 18 n/a n/a

FirstTransPennineExpress 8 0 8 12.1 20.1

GreaterAnglia −4.2 0 −4.2 8.1 3.9

LondonMidland 5 0 5 10.7 15.8

NationalExpressEastAnglia −5.3 1.8 −3.5 8.6 5.1

NorthernRail 8.2 −0.9 7.3 27.6 34.9

Southeastern 1.5 1.9 3.4 9.7 13

Southern −0.6 0 −0.6 7 6.4

SouthWestTrains −8.8 2.4 −6.4 7.4 0.9

VirginTrains −5.7 1.2 −4.5 8.1 3.6

Source:DfT/ORR.

aNotes:Directsubsidy’relatestopaymentsmadedirectlytotheTOCS,calculatedfromthecompanyannualreportandaccountsandORRdata.‘Indirect

subsidy’includestheeffectsofthegovernment’sNetworkGranttoNetworkRail,whichenablesthecompanytochargelowertrackaccesschargestothe TOCs.

debtfinancedinrecentyears,increasingitsdebttoover

£

30bninthespaceofadecade,consistingmainlyofrecentlyissued long-termdebt2.ThisheavyrelianceondebtfinancingwillcontinueasNetworkRailimplementsaplanned

£

38billionof

capitalinvestmentoverthenextfiveyears(DepartmentforTransport,2014).WhileeasingthefinancialstressontheTOCs, theresultofthisdebtburdenisthattherailsystemasawholeacquiredanewstakeholderwithfinancialclaimsthatmustbe prioritisedabovecashusedforinternalre-investment.In2003–2004,NetworkRail’sspendingontrackmaintenancewas,at

£

1.5bn(adjustedforinflation)roughlyfourtimeslargerthaninterestpaid.Thecompany’sdebthassubsequentlyincreased totheextentthatNetworkRailin2011/12spentsignificantlymoreonservicingitsdebtthanonmaintainingthetrack,with

£

968monthelatterand

£

1324montheformer(AppendixD).Whileperhapsnotintendedassuch,theoutcomeofNetwork

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Rail’sfinancialarrangementshasbeentheconstructionofprofitabilityamongTOCswhichwouldotherwisehavedepended onsubstantialdirectsubsidy.

3.1. Financialtransformationandtradenarratives

Risingpassengernumbers,increasedTOCprofitsandinflatedfranchisepaymentstogovernmentenabledtheTOCsto arguethatprivatisationhasbeensuccessfulanddeliveredonitspromises.Theunderlyingreferentfortheseclaimsofsuccess isthemodelofrailprivatisationsetoutinthe1992WhitePaperwhichformedthebasisforsubsequentlegislation.This shortdocumentlaidoutaseriesofpromisesaboutwhatrailprivatisationwouldachieve.Alongsidevagueassurancesabout competition,managementfreedomandincreasingthefocusoncustomers’needsasignificantmeasurablepromisewasthe (eventual)totaltransferofcostsandfinancialriskstotheprivatesector(SecretaryofStateforTransport,1992).

ThesystemofrailprivatisationsetoutinBritainhasthereforeachievedalmosttheexactoppositefinanciallyofthe objectivessetoutinthe1992White Paper.Thestatehasbeenburdenedwiththefinancialrisksandcostsoftherail infrastructure.Meanwhile,thesystemofaccountingcreatesartificialprofitabilityinanactivitythatwouldotherwisebe entirelyuneconomicfortheTOCs.TheaccountingfixesfacilitatetheparadoxwherebytheTOCs’tradeassociation,ATOC, andpoliticalbackersofprivatisationarestillabletoclaimthatthereformshavedelivered“stunningimprovements”and constituteanother“aBritishsuccessstory”(ATOC,2013).Theseclaimsformpartoftherailsector’stradenarrative,which upholdstheimaginaryofprivatisationandshapespublicdiscourseonrailaroundtheinterestsoftheTOCs.

Thistradenarrativehasbecomeincreasinglystridentoverrecentyearsasthefranchisingmodelhascomeundercriticism. ThiscriticismwassparkedbyhighprofilefailuresoftwosuccessivefranchisesontheEastCoastMainline(ECML)after over-optimisticbidswereacceptedbytheDfT,andtheabortedre-franchisingoftheWestCoastMainlinein2012followingthe discoveryoferrorsintheDfT’sassessmentsofthewinningbid(McCartney&Stittle,2011;Brown,2013).Aswellasproviding ammunitionfortheargumentsofanti-privatisationopponentsintheBritishtradeunionmovement,theseproblemshave, moresignificantly,ledtotheoppositionLabourPartystatingthatitwouldfavourallowingastate-ownedorganisationto continueoperatingtheECML,orevenconsiderwholesalerenationalisationofthesystem(Pickard&Odell,2013;Wintour, 2013).Opinionpollshavealsohighlightedcontinuedpublicsupportforre-nationalisationofrail(e.g.YouGov,2013).

Thetradenarrativeisproppedupbysupportivestatisticshighlightinggrowthinpassengerjourneys–ametricwhichis heavilyinfluencedbyfactorsbeyondthecontroloftheTOCs–andsatisfactionsurveyscores,whichframechoicesinnarrow anddepoliticisedterms(Bowmanetal.,2013b,pp.110–128).Itisalsocruciallysupportedbytheclaimthatrailoperators produceanetgainforthetaxpayerandthatthisbenefithasbeenachievedthroughcompetitionamongprivateenterprises. ATOCinrecentpublic-relationsmaterialclaimsFranchisePaymentstogovernmenthaverisenfrom

£

400min1997/8to

£

1.7bnin2012/13,asaresultoftheincreasedprofitabilityoftherailoperators(ATOC,2013).Theorganisationstates: ThefranchisingmodelhasenabledtraincompaniestogeneratesignificantfinancialreturnsfortheGovernment, playedacrucialroleindeliveringunprecedentedgrowthinjourneynumbers,andprovidedpassengerswithimproved servicesandbettervalue(Ibid:29)

RichardBranson’sdefenceofVirgin’sWestCoastMainLine(WCML)franchiseinAugust2012isanaptexampleofthe narrativeinaction,touchingupontheeliminationofstatesubsidy,andtheroleofprivatesectormanagementexpertisein transformingafailedindustryunderstateownership:

(Virgin)wonthefranchisein1997withanagendatochangeradicallythewaypeopleviewedandusedthetrain.At thetimethetrackwasrun-down,staffdemoralised,theserviceriddledwithdelaysandreliantonheavysubsidies. Wesethugelychallengingtargetstodramaticallyspeedupjourneytimeswithmoderntiltingtrains,increasethe frequencyoftheservice,improvetheon-boardexperience;aswellasdoublepassengernumbersandreturntheline toprofit.Weweretolditwas‘MissionImpossible’andourplanswerelaughedatbycritics.However,15yearslater, despitecontinuedproblemswiththetrack,wehaveachievedourtargets(VirginTrains,2012).

InasubsequentarticleforTheGuardiannewspaperdefendingVirgin’srecordontheWCMLclaimedthecompanyhad achieved“abigturnaroundfromtheliabilityweinheritedandinthattimeweandourpartnershavetakentotaldividends of

£

499m,whilethegovernmentandthetaxpayerhaveseenariseinrevenuesandamassiveincreaseinassetsvalues”

(Branson,2013).

3.2. Politicalco-dependenceandthepoliticalresilienceofprivatisation

Thepoliticalsignificanceofthesubsidyarrangementdescribedintheprecedingsectionsisreflectedintheadoptionof thetradenarrativebykeygovernmentofficialsandgovernmentministers,whoareenrolledin–andco-dependentupon –theappearanceofsuccessinrailprivatisation.Similararguments,forexample,havebeenmadebytransportsecretary, PatrickMcLoughlin,speakingatacelebrationhostedbyATOCfor20yearssincetheonsetofrailprivatisationoutlinedhis commitmenttothemodelofrailfranchisingbydrawingadichotomybetweenpastfailuresunderpublicownershipand recentsuccessderivedfromtheentrepreneurialskilloftheTOCs:

Franchising might still be criticised by those who want to turn backwards. Those who think centralised control is the future. Those who can’t see the significant benefits that private sector operators have

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brought to the railway. Those who haven’t learnt any lessons from the past (Department for Transport,

2013)

TheBrownReviewofrailfranchising(Brown,2013),commissionedinthewakeofthe2012WestCoastMainline franchis-ingfailure,demonstratessimultaneouslytheresilienceoftherailindustrytradenarrativeandtheinterconnectedinterests ofpolitical,stateandprivatesectorelitesaroundrail.Insteadofalengthierreviewofthefranchisingsystemcarriedout bydisinterestedparties,theTransportSecretaryexplicitlytaskedRichardBrown,chairofEurostarandaformerchairof ATOC,todeveloprecommendationson‘howtogettheotherfranchisecompetitionsbackontrackassoonaspossible’(DfT,

2012a).Browndeliveredareportfront-endedwiththestatement,‘IsharetheGovernment’sview...thattherailindustry

works,andthatthereisnocrediblecaseformajorstructuralchange...Itisveryimportantthatthefranchisingprogramme isrestartedassoonaspossible’(Brown,2013).ThisallowedtheTransportSecretaryPatrickMcLoughlintosay,‘Thereview hasconfirmedthatGovernment’sapproachtorailfranchisingsystemisstillthebestwaytosecuretherailservicesfortax payersandfarepayersalike’(DfT,2013a).

Thegovernment’scommitmenttomaintainingrailfranchisinginthefaceofchallengeswasfurtherunderscoredwiththe re-franchisingprocessfortheEastCoastMainline(ECML)in2014.Wehavealreadynotedthattwosuccessiveprivatesector operatorsofthefranchisehadfailedinrapidsuccession:GreatNorthEasternRailwaysin2007,andNationalExpressEast Coastin2009aftermakingwhatprovedtobeexcessivelyoptimisticestimatesoftherevenuestheywouldreceiveandthe franchisepaymentstheycouldtherebyafford(McCartney&Stittle,2011).AsaresulttheUKGovernmenttookovertheECML franchisethroughDirectlyOperatedRail(DOR).Duringdifficulteconomiccircumstances,andwithoneoftheoldestrolling stockfleetsofanyoperatorinthecountry,DORperformedcreditably,usinglesssubsidythananyoftheprivately-controlled franchises,returning

£

208mtothetaxpayerinpremiumpaymentsanddividends,andachievingthehighesteverPassenger FocussatisfactionscorefortheECMLinthe2012/13financialyear(DirectlyOperatedRail,2013).Thesesuccessesledto callsfromtheLabouroppositionandthetradeunionstomaintainDOR’scontrolofthefranchisetoserveasabenchmark forprivatesector-controlledfranchises,orallowittocompetewithprivatesectoroperatorsinare-franchisingprocess

(Topham,2013).Thegovernment’sresponsewastopushthere-franchisingprocessfortheECMLforwardtoenableitto

takeplacebeforethe2015generalelectionandforbiddingDORfromcompetinginthebiddingprocess(Topham,2014). AnnouncingthedecisiontotheHouseofCommonsinMarch2013,TransportSecretaryPatrickMcgloughlinstatedthat successonBritain’srailwaysintermsofgrowthinpassengernumbers:

...hasn’tbeenachieveddespiteprivatisation.Ithasbeenachievedbecauseofprivatisation...forthemoneythat passengersandtaxpayersputinweshouldexpect...ambition...innovation...andevenbetterperformancefor pas-sengers.Andthis[franchising]isthewaytogetit(DfT,2013b).

ItisdifficulttoimaginethattheseclaimsaboutsuccessfromBrown,McGloughlin,BransonandATOCcouldbemadewith asmuchforceandconfidenceweretheTOCstostillbeinreceiptofsignificantdirectpublicsubsidiesrequiredtopayNetwork Rail’sfullcosts.Inthisscenario,theTOCswouldbeunabletobeportrayedasefficiententerprisesachievingindependent success.Theroleofaccountingintermsofdisguisinganddisplacingincome,costs,capitalisationsandriskisusedtosupport thepoliticalnarrativesthatinturngeneratetheappearanceofasuccessfullyprivatisedutility.Deconstructingthefinancial numbersandfollowingthemoneyrevealsthediscrepancybetweenpromisesandoutcomes.Thispaperthereforeunderlines howaccountingsystemscanbeimplicatedintheprocessofappearancemanagementbypolicyandindustryelites.

4. Discussionandconclusions

ThisarticlehasarguedthattheBritishrailindustrycanbarelybecalledprivatisedinameaningfulsenseanylonger, becauseoftheextensivesubsidiesprovidedforinfrastructureprovisionand,from2014,theformalre-designationofNetwork Raildebtasapublicliability.However,themannerinwhichsubsidieshavebeenchannelledthroughNetworkRailhas allowedbackersofprivatisationamongthetrainoperatorsandthepoliticalelitestomaintaintheirnarrativesaboutthe promiseandoutcomesofprivatisation.Thisisbecausetheaccountingnumbersandtheirpresentationaremalleableand implicatedintheattemptstocreateafavourableimageoftheprivatisedrailindustry.Thepurposeofthispaperhasbeen todeconstructthesenumbersandidentifyhowreformsdisplaceandalterthepresentationoffinancialinformationover time.Thispaperthereforesuggeststhataccountingandcriticalaccountantshavearoletoplayinchallengingthepolitical narrativesabouttransformationinprivatisedutilitiessuchasrail.

5. Funding

Thisarticleisbaseduponresearchwhichwasco-fundedbytheTradeUnionCongress(TUC)andtheESRCCentrefor ResearchonSocio-CulturalChange(CRESC).TheTUCprovidedfundingtoobtainanindependentacademicperspectiveon theimpactsofrailprivatisation,whichresultedinaCRESCpublicinterestworkingpaperinJune2013.TheTUCprovided commentsonthepublicinterestreport,butplayednoroleinthecollection,analysisorinterpretationofthedatacontained inthereportandinthisarticle.TheTUCplayednoroleinthedecisiontosubmitthisarticleforpublicationandhaveplayed noroleinitsdrafting.

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Acknowledgements

TheauthorwouldliketoacknowledgeotherresearchersaffiliatedwithCRESCfortheircommentsondraftsofthearticle, specificallySukhdevJohal,KarelWilliams,andJulieFroud.Thearticlewaswrittenwhiletheauthorwasavisitingresearcher attheDepartmentofPoliticalStudiesattheUniversityoftheWitwatersrand.

AppendixA.

Realpassengerrevenuesandgovernmentgrants Totalpassenger

revenue

Totalstatesupporttotherailindustry incPTEgrants(excludingfreight)

Totalpassengerrevenue andtotalstategrants

Passengerrevenueasashareof passengerrevenueandtotalstategrants

£mill. £mill. £mill. %

1986/1987 3441 2020 5461 63.0 1987/1988 3688 1394 5081 72.6 1988/1989 3803 941 4743 80.2 1989/1990 3673 1531 5204 70.6 1990/1991 3741 2168 5909 63.3 1991/1992 3713 2778 6491 57.2 1992/1993 3718 3748 7466 49.8 1993/1994 3697 2743 6440 57.4 1994/1995 3536 2764 6300 56.1 1995/1996 3784 686 4470 84.7 1996/1997 3970 1629 5599 70.9 1997/1998 4209 2729 6938 60.7 1998/1999 4541 2331 6872 66.1 1999/2000 4807 2024 6830 70.4 2000/2001 4786 1702 6488 73.8 2001/2002 4891 2517 7408 66.0 2002/2003 4907 3467 8374 58.6 2003/2004 5061 4711 9772 51.8 2004/2005 5261 4796 10,057 52.3 2005/2006 5508 5642 11,150 49.4 2006/2007 5891 7415 13,306 44.3 2007/2008 6278 5982 12,261 51.2 2008/2009 6865 5921 12,787 53.7 2009/2010 6750 5016 11,766 57.4 2010/2011 6881 4088 10,968 62.7 2011/2012 7273 3901 11,174 65.1

Sources: ORR andSN/SG/617, HouseofCommons.Notes:Subsidy:2001/2002–2003/2004includes £3.520bn governmentgrantsdirectly to

Rail-track/NetworkRailandLondon&ContinentalRailways.Includingnon-franchisedpassengerrevenue(£36.7in2009/2010and£45.5in2010/2011) Passengerrevenueincludesallticketrevenueandmiscellaneouschargesassociatedwithpassengertravelonnationalrailways,e.g.carparkingcharges. ForticketsinvolvingtravelonLondonTransport,receiptshavebeenapportioned.Passengerrevenuedoesnotincludegovernmentsupportorgrants.

AppendixB.

GovernmentsubsidyforTrainOperatingCompaniesandNetworkRail(£m,2012prices) Netcentralgovernment

revenuesupportgrants forTrainOperating Companies

Network Railgrant income

NetworkRail/Railtrack incomefromTrackAccess ChargespaidbyTrain operatingCompanies TOC passenger revenue TOCsubsidyas %ofpassenger revenue NetworkRail subsidyas%of TOCpassenger revenue TrainOperating Companydirect subsidyas%ofTrack accesscharges £m £m £m £m % % % 1995 2589 0 1955 3536 73 0 132 1996 2383 0 2003 3784 63 0 119 1997 2473 0 2119 3970 62 0 117 1998 1923 0 2131 4209 46 0 90 1999 1589 0 2169 4541 35 0 73 2000 1359 0 2175 4807 28 0 62 2001 1103 0 2089 4786 23 0 53 2002 940 2818 1256 4891 19 58 75 2003 1186 2506 1356 4907 24 51 87 2004 1701 2622 1581 5061 34 52 108 2005 1077 2604 1043 5261 20 49 103 2006 1054 2431 1122 5508 19 44 94 2007 1705 3793 1855 5891 29 64 92 2008 1269 3711 1968 6278 20 59 65 2009 302 4564 1458 6865 4 66 21 2010 500 4051 1501 6750 7 60 33 2011 −52 3901 1603 6881 −1 57 −3 2012 −133 3989 1593 7273 −2 55 −8

Source:ORR,NetworkRail.Notes:NetworkRailgrantincomeincludesgrantsdeferredgrantsandincentiveadjustments.SubsidytoTOCsincludesgrants,

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AppendixC.

Franchisepassengerkmtravelled,comparedtoNetworkRailrevenueandTOCpassengerrevenue(all£madjustedto2012prices) Franchisedpassenger

kilometrestravelled

NetworkRailrevenuefrom trackaccesscharges

TOCrevenuefrom passengerfares km £m £m 2003 39,678 1817 4907 2004 40,906 2056 5061 2005 41,705 1320 5261 2006 43,146 1376 5508 2007 46,154 2180 5891 2008 48,930 2224 6278 2009 50,613 1656 6865 2010 51,101 1630 6750 2011 54,074 1655 6881 2012 56,900 1593 7273 %Increase,2003–2012 43 −12 48

Source:RegulatoryaccountsandORRNationalRailTrends.

AppendixD.

NetworkRailspendingoninfrastructurecomparedtonetinterestpaid(£m,2012prices)

Spendingonmaintenance Netinterestpaid

£m £m 2003 1502 256 2004 1763 548 2005 1559 899 2006 1429 1133 2007 1342 1193 2008 1264 1250 2009 1274 1126 2010 1147 1134 2011 1095 1460 2012 968 1324 References

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