HS2 may be doomed – because of cost increases.

What has never had enough attention is the fact that there is very unlikely to be sufficient revenue to cover operational costs – the taxpayer will have to pay to run the trains.

Forget recovering the capital cost. It is a sunk cost from day one, that is excluding the wasted and worthless millions spent to date.

I had hope that my first airing of the following would get pro HS2 folk to challenge,check and maybe find me wrong.

Passengers per km per day on HS lines (2011 base)

Germany 87

France 87

Japan 111

UK case for HS2 221

spot the odd one out!

then where will the passengers come from?

The fact that the DfT case assumes 69% of passengers will come from existing routes never explained how the income lost to these routes would be replaced – leaving the tax payer to further support these routes.

Then the recently proposed de-scoping reduction in train numbers per hour and line speeds both significantly deteriorate the original over optimistic figures.

BUT positively targeted UK rail investments can bring long term economic benefits (and real £££) – I am afraid HS2 never will.

At last a review of the flawed approach to UK franchises.  The fundamental problem is the UK rail business model.

The four significant UK rail sectors may be classed as:

1. Commuter – including longer distance in the South East
2. Rural
3. Freight
4. Intercity

1 to 3 are essential for economic sustainability and growth, most also require some degree of financial support – at least in relation to infrastructure costs.

Apart from freight which valiantly operates in the private sector it is a pretence to consider that private sector can or will invest anything over the tenure of these franchises – they have to recoup a positive amount of cash from net revenue cash flows over the term of the franchise.

Commuter and Rural should be under the control of the local authority giving local accountability and the opportunity for local funding.

More on the sectors 1 to 3 will be covered in later commentaries

The Inter-city problem

The principal flaws of the existing intercity franchises are:

A  There is a dictated “British Rail” time table – is this necessary?

There are social benefits arising from running a ‘full’ timetable.   These could be met by using the concept of ‘Parliamentary’ trains running as a condition of access.

B  There is no direct link between cost of use of infrastructure and fares paid.

A significant cost for franchise holders is access and this is basically a flat rate.  The cost of using the infrastructure is not directly linked to revenue.   For a franchise holder it makes sense to charge a passenger enough to cover the marginal operating costs, but obviously more if possible.  For profitable routes and services Network rail gains little.

If revenue does not cover the access costs then, as we have seen, operators desert the franchise and the risks and costs pass back to the taxpayer.

C  Short term franchises and yield management

The concept of yield management works for the airlines who are free to fly planes to wherever and whenever suits.  Intercity has to run a dictated service and pay for route infrastructure.

Evidence that yield management as used by railway companies may be depriving UK rail (infrastructure investment) of funds can be identified from this table.

(which the due to the limitations of WordPress is not included – e-mail me at ralph@tiffin.co.uk if you would like a copy)

Salient figures are that multiples of dearest (the full fare) over advance tickets range up to 7.3 times for standard tickets and 5.3 times for first class. The table has examples for FGW Virgin Greater Anglia LNER

Just what is a fair fare?  That is fair for the passenger, the operator and the taxpayer?

You only have to travel on the trains at times with the absurdly cheap fares to realise something is amiss:

• Often they are virtually empty.
• Why is this service running at all?
• How many of the passengers are only there because of the cheap fare?
• Do many of the passengers not have to make the journey and thus should pay a reasonable fare?

The Rail Delivery Group are at least consulting on this issue.

BUT more unfair, at least to passengers and infrastructure funding. You only have to travel on trains at many allegedly “peak” times – to find plenty of empty seats – so yield management is not working in the passenger’s favour.  Nor does the revenue extracted by franchise holders flow to Network Rail.

A solution

For intercity (and this does not simply mean lines radiating out of London) two or more competing entities, paying appropriate access charges per train would change behaviours.

• Network Rail would have to earn a significant income stream
• Operators would have to offer decent services to run profitable (not simply breakeven cash flow) services.
• If one operator claimed all times were “peak”, then a competitor could respond – unless of course there was collusion!
• Customers would have choice – which feeds back to pressure on operators.

Entities would be real railway companies with full responsibility for owning or leasing rolling stock, employing staff, marketing and running services – in perpetuity – they would have to have long term commitment

The proposal for multi-decade monopoly route franchises will only make matters worse – better to Nationalise the railways!

And on that note this current franchise review should look carefully at the proposed WCML/HS2 franchise.  It will be a complete dereliction of political responsibility if planning is handed over to a monopoly consortium of “world class” operators.  All the risks, the loss of revenue on existing lines and the necessary subsidies for new services will remain with taxpayers.

Better nationalise HS2  BUT, of course at this stage it is nationalised in that the State and thus taxpayers pay for and thus own the project.

 

– the economic case Malaysia cf HS2

Interestingly Malaysia was talking of abandoning the KL – Singapore HS line.  This is a textbook example of a route with traffic volumes that should be ideal for an economically viable high speed railway.  However it is good to see high speed mania being challenged on the grounds of capital if not operating cost.  It may be politics, money, the cost, the revenue or a mix – it is early days.  BUT it does make sense in that the existing route is being enhanced and will serve at least four major centres – not every one will want to hurtle from the Singapore or JB to KL.

Now it seems the development is merely postponed – that is good as it could be a successful project.  Malaysia and the region has economic and population growth ahead.

There has been silence since the revised but still flawed October 2013 ‘economic case’ for HS2 – as to where the projected passenger numbers are to come from.  Not every intercity rail journey is north from London and rail growth is not expanding at the fanciful rates dreamt up by the DfT and bidders for existing intercity franchises.

Further I have yet to hear a discussion on or an explanation of how the 69% of HS2 traffic to be extracted from existing routes will affect the viability of these routes.  It does not take a genius to identify that capacity will be freed up on the existing routes – but even with the UK flawed franchise system the fare paying passengers on existing routes mean that there is money that flows to Network Rail’s operation and maintenance of the routes.

Who will cover any shortfall? Will the tax payer have to cover the existing routes’ deficits, as well as subsidise HS2 operations?

HS2 forecasts of income need to be revisited – never mind the increasing capital costs.

The existing intercity franchise model is broken-

1. Multiple failures – ECML for one
2. Very limited competition or choice for passengers
3. Basically fixed annual access amounts (how do they relate to usage?) This leads to uneconomic fare regimes.
4. Franchise holders encouraged to run more trains to improve ‘efficiency’. Virgin East Coast talked of running more trains on a Saturday – maybe some marginal income for them but no economic benefit for UK rail – possibly denying access for freight
5. Inefficient rolling stock procurement – dictatorial and inappropriate specification No investment from franchise holders over the life of the franchise – let’s be clear on this if there was no net cashflow surplus over the life of the short franchises then shareholders should complain or quit (as they do)
6. NO long-term strategy for the UK intercity rail

 

These flaws are being replicated in the ‘planning’ for HS2 services. The Department for Transport (DfT) is –

seeking to attract a world class partner to develop and enhance the existing InterCity West Coast (ICWC) operation and help shape the development of HS2 and operate its first services in 2026.

1. What kind of strategy is this?
2. Why do we pay ministers and public servants?
3. How will whoever is selected for the above task cope with extravagant forecasts of likely users of HS2
4. Further what is seldom mentioned how will the dramatic effect on lost revenue on existing lines be recovered? The economic case for HS2 assumes 69% of traffic will be extracted from existing routes.

What would be better?

1. Have realistically priced access rights, possibly with some public service obligations, for a reasonable and practical number of competitors and services on each route.
2. This can be done by charging realistic access charges – funding for the infrastructure, and thus
3. Make Network Rail have to earn its revenue like a normal company
4. Let competitive demand for service quality, timeliness, rolling stock etc lead to attractive but profitable services.
5. The railway companies with their portfolio of paths (with some public service obligations) could then plan and invest as long term investors – purchasing or leasing rolling stock that meets their demand.

 

There are signs that some in the industry are brave enough to challenge the diktats of the DfT and short-termist ministers.

• There’s talk of changes to the UK ticket pricing system. About time – Yield management no doubt works for airlines – they just fly routes and schedules that suit them.
• There’s talk of questioning the ridged, dictated timetabling.
• Even the nonsense of preventing ‘abstraction’ is being challenged
• Maybe more of the big players realise that the idea of the short term franchise money earner is short sighted for their ‘sustainable’ (to use that fashionable word) companies.

 

We need action now to bring long term strategy and investment to UK intercity rail – or maybe British Rail is the answer?

 

British Railways and Brexit

Don’t blame Brussels on the state of UK rail operations. There is much that is great about British railways today but many economic weaknesses and thus operational weaknesses are entirely self-inflicted.

The EU model of separating track and operations has much to commend it,but is not the only appropriate model.

The UK took to ‘privatisation’, for political expedient.  If poor Maggie (Thatcher) had not been ditched it might not have happened.  Instead of open access and competition the UK has endured nearly 20 years of Stalinist style, ministry imposed (Department of Transport – DfT) ‘franchises’  Timetable and services often appropriate for a state railway years ago. No choice for customers.  Rolling stock procured inefficiently by the DfT.

So the lesson for other countries that want a state railway on the cheap – either control it yourself – outsourcing some activities can make sense. But for intercity services calculate access charges, encourage open access and have true open access.

Give consumers choice and maybe more importantly as governments need investment to win votes let equity and finance flow to long-term railway operating companies, who will invest in real assets.

Short term franchise or concession holders only aim has to be to extract whatever cash they can over the finite life of their contract.

Open access or nationalised – the choice is yours!