Corbyn and the railways: the costs of having a life-size trainset

A major part of Corbyn’s campaign to become leader of the Labour Party was the promise to re-nationalise the operation of the UK railways. Indeed, that promise became Corbyn’s very first official policy, with part of the supposed rationale being that “the public have paid £10 billions in subsidies and the operators have posted aggregate profits of £1 billion” since the railways were privatised.

Although there have been a few articles in the mainstream media that purport to examine the feasibility of re-nationalisation in terms of the costs of doing so (see, for example, here and here), these articles have, at best, been cursory and only scratched the surface.

In particular, these articles fail to examine 1) the initial costs of regaining control of the railways from private operators; and 2) the annual costs of running the railways once they have been re-nationalised. These are discussed in turn below.

The first issue of the government regaining control of the railways could be solved costlessly (in terms of government money) if a Corbyn government were willing to wait until the franchises running the railways came to a natural end. However, this approach does not seem likely for two reasons. First, the current schedule of rail franchises indicates that all will run out prior to 2020 (the first year of an hypothetical Corbyn government), such that the current Conservative government likely would re-new the franchises at lengths of around 7-10 years (as suggested by the Brown Review) means that the earliest date at which a franchise will expire under an hypothetical Corbyn government would be 2022. Second, given that the policy of re-nationalisation was the first of Corbyn’s official policies, it seems that Corbyn would be unwilling to wait particularly long to enact this policy.

Hence, Corbyn’s re-nationalisation most likely would require buying out all franchise owners. Although there do not appear to be any publicly available figures regarding how much it would cost to buy out all rail franchises, we can construct a back-of-the-envelope estimate. Using the fact that Stagecoach and Virgin paid £3.3bn for one franchise (implying that the franchisees consider a franchise to be worth at least that much), and assuming that this value is directly related to the number of passenger kilometres (i.e. the value of a passenger kilometre is the same across all franchises, then using the information provided in the Office for Rail Regulation Report here (excluding London Overground),  the total value of all rail franchises in the UK is about £38bn. This amounts to a one-off cost of roughly 3% of GDP in the year in which the Corbyn government would re-gain control of the railways.

Although that doesn’t sound too bad, there is also the second item involved in running the railways – namely, the ongoing costs (or profits) from operating them. Indeed, currently the franchises together have a profit margin of about 3% – in other words the railway operators make roughly £250 million per year as profit.

While it might be tempting to conclude that re-nationalising the railways would therefore actually make it profitable on an annual basis to do so, this would imply that it would take almost 150 years for the initial £38bn cost to be recouped by the government. That probably does not make much business sense.

Moreover, that £250 million per year figure assumes that the current prices, price increases, and levels of investment apply in future. However, isn’t the entire rationale for Corbyn wanting to re-nationalise the railways so that prices are kept lower and investment higher than they would be if the railways were not re-nationalised? Although it is difficult to put an exact figure on how much it would cost per year to achieve Corbyn’s aims of lower prices and/or higher investment levels, it is plausible that they would pretty much wipe out any current profit. In other words, the initial outlay of £38bn is unlikely to ever be recouped.

Now, whether you think that this outlay of public funds that are unlikely to ever be recouped (and that could be used for other things such as new hospitals, new schools etc. if they were not used to re-nationalise the railways) is worth having possibly (but not guaranteed) lower prices and higher investment levels, then that’s your choice. But I know where I’d rather have £38bn spent, and it’s not on taking back control of the railways.