This week saw a historic moment for Scotland’s economy as it was announced on Wednesday that ScotRail services ‘will be provided in public hands through a company wholly owned and controlled by the Scottish Government.’ This landmark transition will take force in March next year when the contract for Abellio, the Dutch government-owned current franchise operator, is set to end.
This policy shift represents a drastic departure from the last three decades of rail service ownership. The Railways Act 1993 paved the way for the current privatised railway system, and train operating companies were awarded franchises in the years to follow. The ScotRail franchise was the last of the British Rail’s passenger train operating companies to be privatised in 1997, with the franchise subsequently being held by National Express, First Group and, from 2015, Abellio.
The decision to take Scotland’s rail services into public ownership came just months after trade unions, civil society organisations and MSPs called for ‘a public operator in the New Year’ to ‘provide greater stability and resilience for Scotland’s railways,’ with the Scottish Government reiterating that the franchising model is ‘no longer fit for purpose.’
The move now sets out a broader trend across the UK, with Wales announcing in October that rail services will be brought under government control from February, seeing a takeover from the previous operator, KeolisAmey, with services run by a publicly-owned company to avoid what the Economy Minister described as a ‘catastrophic transfer’ to the operator of last resort.
As the pandemic took grip last spring and vast swathes of the economy were plunged into a prolonged period of hibernation in an effort to safeguard lives, entire sectors underwent a rapid and stark contraction in demand. The railways were hit particularly hard, requiring significant public intervention.
Train services had been underwritten by the Scottish government through emergency contracts since March last year, while the UK government temporarily suspended the rail franchise system, effectively nationalising losses by railway companies. By June, the UK government had approved £3.5 billion of additional expenditure to keep the railways operating amid the crisis.
Avoiding the collapse of this vital industry was essential, not least to protect jobs of railway workers, ensure safe and reliable transport for key workers, and to safeguard a pillar of our decarbonisation strategy. While this remains true, the scale of intervention raised questions concerning broader trends in the mechanisms by which rail companies are bailed out, whose interests are served, and how the sector should be organised in the post-crisis landscape.
Privatising Profits, Socialising Losses
A key argument for private rail services is often that companies bear the financial risks in times of financial uncertainty or crisis. While the demand slump was unprecedented during lockdown, the tendency for the government to step in to save private rail firms long predates the pandemic.
Following the turmoil of GNER in 2007 and National Express in 2009, the East Coast rail service was temporarily nationalised in 2018 after the Virgin and Stagecoach operators could not meet payments in the £3.3 billion contract. Incidentally, the East Coast Main Line generated £1 billion for the public purse in the five years from 2009 while nationalised, but was subsequently reprivatised – only to be subsequently nationalised again.
In January 2020, Northern Rail, operated by the German-based Arriva Rail, which had been due to run Northern until March 2025, was brought under government control following timetable chaos, reliability issues, infrastructure issues, an aging fleet, and strike action.
At the same time, Southern Western Railway franchise, a joint venture between FirstGroup and the Hong Kong-based MTR, reportedly faced the prospect of nationalisation, after filings revealed the train operator lost £137 million in the year to March 2019, as well as facing 27 days of strike action over job security uncertainty in November 2019.
In September last year, it was reported that industry experts thought the nationalisation of South Western Railway was still a possibility, alongside TransPennine, which also faced turbulence before the pandemic.
Some commentators have declared that privatisation has successfully weaned the sector off taxpayer subsidies. While direct subsidies to train operators have fallen, government grants paid to Network Rail (referred to as the Network Grant) have soared.
Importantly, although the Network Grant is initially paid to Network Rail, this is ultimately passed on to the private train operators in the form of an indirect subsidy — as the Office for Rail and Road acknowledged. Overall total subsidies to the sector have nearly doubled since privatisation. Without these generous subsidies, train operators would not be able to generate profit.
Moreover, despite the UK having largely privatised rail franchises, commercial subsidiaries of other countries’ publicly owned rail firms are relatively common in our rail system, with governments being the sole or majority owner of several rail service franchises. Part of the UK’s rail franchise system also involves long operating chains, including stakes from the likes of BlackRock and Vanguard.
The idea was that private rail companies would bring in capital and business expertise, which would in turn transform the sector’s performance, but as the Trades Union Congress noted last year, private rail companies paid out more than £1.2 billion in dividends to shareholders in the last five years, while rail fares have risen twice as fast as wages in the last decade.
The UK government should follow the lead of Scotland and Wales, and commit to bringing rail services out of the model of private ownership where rail service companies can hand out lucrative profits to shareholders while often sheltering themselves from financial risks, allowing the state to clean up the mess. By removing shareholder payouts, earnings can be reinvested to improve services and reduce rail fares instead of being distributed to major investors.
For Scotland, because of the nature of the current devolution settlement, transforming the economy will need to be an ongoing process, phased in over time. But the decision to take rail service into public ownership should be a meaningful step in a longer term strategy rooted in economic democracy, from scaling publicly owned low carbon electric buses to reimagining adult social care, shifting our understanding of this approach from a patchwork of good individual policies and towards a strategy to integrate democratic public ownership at the heart of a transition to a new economy.