How further rail reform could fund a fare freeze
Introduction
RMT warmly welcomed the government’s commitment to create Great British Railways. A single, integrated publicly owned railway is something that the union has fought for since the disastrous privatisation experiment began in 1994. The passage of the public ownership Act in December and the consultation on the new publicly owned body, which opened last month are historic steps forward. As the Secretary of State Heidi Alexander, rightly noted at the time, this will save £150 million in Train Operating Company profits every year.
When the Tories blasted the railway into a fragments 1994, they created a new set of parasitic private companies who turned taxpayers’ money and passenger fares into shareholder dividends for their City owners.
The government has taken decisive action to tackle the most obvious of these, the train operating companies, who are finally being exiled from passenger operations through the Passenger Rail Services (Public Ownership) Act.
But less well known are the other parasitic interests who remain on the railway. Tackling these interests could save Great British Railways £630 million a year in profit leakage.
In this briefing, we explain how.
Table 1: Savings from further rail reform
The Rolling Stock Companies:
The Rolling Stock Companies (Roscos) were handed BRs trains so that they could lease them back to the railways. The Roscos sweated their ageing trains until they could be persuaded to buy new one by the reassuring sight of successive governments waving subsidies at them. These are incredibly profitable. ORR data shows that last year, the rolling stock companies paid dividends of £331 million to their shareholders. On average they pay 100% of their profits as dividend. In addition, these companies extract more value from their assets through interest on intra-group lending.
Table 2: Rosco profits and dividends
The cost of leasing rolling stock has doubled as a proportion of TOC spending from 13% in 2013/14 to 26% in 2023/24. The rising cost of leasing rolling stock is an increasingly heavy burden on the railways and it can’t be ignored.
Sub-contracted renewals work for Network Rail
Network Rail sub-contracts with companies like Balfour Beatty, Volker Rail, Babcock and Colas for renewals projects on its track and signalling. In 2022, Network Rail spent around £3 billion on renewals projects.
Network Rail’s continued outsourcing of renewals work has cost the public a lot of money. In 2003, David Clarke, Strategy Director at Jarvis Rail, estimated that the commercial margin demanded by contractors was in the “range” of 4% for maintenance and 6% for renewals. In addition to eradicating these margins, insourcing could achieve efficiencies, such as ‘removing duplication of systems to manage staff and programmes within contractors and within Network Rail itself, and economies of scale’.2 Using ORR data to calculate a 7-year average for renewals spending, we estimate this, conservatively, at £174 million every year simply from outsourced renewals work. Last year’ the figure would have been £180 million.
One of Network Rail’s major contractors, construction giant Balfour Beatty, paid out £58 million in dividends in their last full year and are currently engaged in a share buyback programme in which the firm’s cash is used to reacquire shares and boost the value of the remaining holdings. As BB report,
“BalfourBeattyisdelivering£160milliontoshareholdersin2024throughsharebuybacks
1 Source: ORR https://dataportal.orr.gov.uk/media/2163/table-7275-rolling-stock-leasing-companyfinances.ods
2 https://publications.parliament.uk/pa/cm200304/cmselect/cmtran/145/145.pdf, p. 30
anddividends,whilemaintaininganappropriatebalancebetweeninvestmentinthe businessandastrongcapitalposition.ThiswilltaketheGroup’sshareholderdistributions toover£750millionsincethelaunchofitscapitalallocationframeworkin2021.”3
77% of Balfour Beatty’s shares are owned by institutional investors with 43% owned by a small group of very large investment banks and asset management funds, including Blackrock, Schroders, Vanguard Asset Management, JP Morgan and M&G.4
Back 2004, the Transport Select Committee recommended that this work be brought back into Network Rail, alongside maintenance. This was never done. Instead, the same companies, employing tens of thousands of workers on zero hours contracts, continue to get these contracts.
Outsourced ‘ancillary’ work on train operations
Perhaps least known of all are the outsourcing companies who took over ‘ancillary’ functions on the railways after privatisation, employing cleaners, caterers and security guards. The people who cleaned our trains and stations during the pandemic were employed by companies like Mitie, ISS, OCS, ABM and Churchill, many of them familiar names from outsourced services in the NHS and local government.
These workers’ pay is often anchored to the National Minimum Wage, they get Statutory Sick Pay and they will have no decent pension in retirement. Career progression and skills development are non-existent.
Estimating the profits of these companies is not easy, as they are not transparently accounted in either company accounts or in the ORR’s data. However, outsourcing costs form part of the ‘other costs’ category of train operating companies in the ORR’s financial data.5
Last year’s ORR data show that ‘other costs’ were £2.8 billion. Assuming, conservatively, that outsourcing contracts account for just 50% of these other costs, that would mean that outsourcing costs would be £1.4 billion across the sector. Outsourcing firms typically make a gross profit of around 9% on their contracts, meaning that profit leakage would be £126 million.6
Outsourcing giant Mitie, which holds a large contract with Network Rail to clean its stations and estates, paid dividends of £41.5 million last year and its CEO received a pay package of £14 million.7 Mitie also spent more than £50 million of its cash in buying its own shares, a technique for ramping up its share price for investors.
71% of Mitie’s shares are held by institutional investors Many of the biggest holdings are by the same investment funds that own Balfour Beatty: Blackrock, Vanguard, and JP Morgan.8
Passenger revenue from fares last year amounted to £10.4 billion. Saving £637 million by cutting
3 https://www.balfourbeatty.com/media-centre/latest/balfour-beatty-2024-trading-update/
4 https://uk.marketscreener.com/quote/stock/BALFOUR-BEATTY-PLC-4000600/company-shareholders/
5 In 2012, the ORR published a Train operating company cost benchmarking report in which they explained that “Other Costs (includes fuel, EC4T charges, in-house train maintenance, train cleaning, other contractor charges, rail replacement, utilities, commission payable, catering, car park management fees, NRES ATOC charges, British Transport Police charges, station access, marketing, telecoms and IT, legal & professional, insurance and depreciation and amortisation)” https://www.orr.gov.uk/sites/default/files/om/tocbenchmarking-report-2012.pdf
6 https://dataportal.orr.gov.uk/statistics/finance/rail-industry-finance
7 https://www.mitie.com/wp-content/uploads/2024/06/Mitie-Annual-Report-2024.pdf
8 https://uk.marketscreener.com/quote/stock/MITIE-GROUP-PLC-9590156/company-shareholders/
out this profit leakage would be enough to fund a fare freeze at the very least.
This would be in addition to the savings and efficiencies that could be achieved by erasing the complex web of contracts and interfaces that cut through the railway as a result of its fragmentation.