The privatisation of the UK rail industry in the 1990s was primarily constructed for the operation of passenger train services. In many ways, this operational framework was unsurprising because of the implementation of a franchised route method. Under this method, passenger train operating companies were largely established on a franchised geographical route basis. Given the relatively low level of rail freight traffic and freight revenues, freight services were not regarded as a dominant factor in establishing a privatised rail industry.

The chosen method by which freight services were privatised was unlike most of the passenger train services. Freight services were designed to operate on a negotiated ‘open access’ or ‘pay as you go’ method by which freight operators only paid for the use of elements of rail infrastructure costs as and when services operated. However, a recent policy change by the government appointed rail regulator has lead to freight operators paying substantially less to use the rail infrastructure services. The resulting financial shortfall for the infrastructure owner will now be met from public funding support. The key issue remains whether substantially increased public subsidies should be used to enhance the earnings of private sector rail freight operators when public benefits from these subsidies have not been established.

With reference to ‘regulatory capture theory’, this paper examines the structure of the UK’s privatised rail industry and the rail freight market. The determination of the level of the track charges will be analysed from the initial ‘negotiated’ approach through to the change to a more deterministic basis. The extent of the ‘capture’ of the rail regulatory framework by freight operators and the resulting use of public monies to reduce the level of track charges to these operators will also be evaluated. An analysis will be made of the effect of the reduction in the charges on the earnings of the freight operators and in the changes (if any) on the level of rail freight traffic.

The underlying objective of the UK rail privatisation process seems to have been to dismantle the previously state-owned and fully integrated railway industry, British Rail.

In particular, the privatisation legislation was designed to separate the ownership of ‘the wheel’ from ‘the track.’ Both passenger and freight train operations would be operated by a number of private sector operators, whilst the track, signalling and station infrastructure would be owned by Railtrack, a publicly listed company (later sold to Network Rail ltd, termed ‘a non for profit’ organisation.) The state owned rolling stock of both locomotives and carriages was sold off to three private sector rolling stock companies. The passenger train operating companies (TOCs) leased rolling stock from one or more of these rolling stock companies. However, most of the freight rolling stock was owned by the rail freight operators or by their customers.

Passenger train operating companies were awarded (on a competitive tendering basis), franchises for 25 specified routes which were largely based on geographically segmented railway lines. Train operators paid track access charges (TACs) to Railtrack (now renamed Network Rail) for use of its infrastructure. However, the freight services of the former state owned British Rail were privatised in a different method. Since freight services could be ‘tailor made’ for each customer and had no defined geographical region of operations, the sector could not be privatised on a geographically franchised route basis. Additionally, the government did not wish to prohibit individual operators who might, at any time, decide to establish their own freight services.^,

Freight operating companies (FOCs) were not restricted to a defined geographical area, they could negotiate train paths over the entire country. The key player in the rail freight industry was initially named North and South Railways Ltd, later renamed English Welsh and Scottish Railways Ltd (EWS), a haulier of bulk goods. The other considerably smaller freight operating company was Freightliner Ltd, hauling intermodal traffic.^, The TACs paid by the FOCs were not necessarily at the same level as paid by the TOCs. (For example, the FOCs did not pay towards Railtrack’s fixed costs.)

Since privatisation, the UK rail industry has been subject to regulation and strategic direction by two authorities. Firstly, to avoid the infrastructure company abusing its monopoly, the government statutorily created the Office of the Rail Regulator (‘the regulator’^,) to regulate and monitor the regulation of the rail infrastructure^, and to determine its return on capital.^,

The main statutory objectives of the ORR, established, under Railways Act 1993, were, inter alia, to: (i) … promote the use of the network and promote efficiency and economy on the part of persons providing rail services; and, (ii) … to ensure efficient utilisation of the network.

Secondly, the government created another regulatory agency, the Strategic Rail Authority^, (SRA) to determine public funding allocations, the awarding of franchises and the strategic direction of the overall railway industry.

In particular, the objectives of the SRA

were defined as, inter alia:

(i) ‘… to promote the use of the railway for the carriage of passengers and goods.’ and (ii) ‘… to secure the development of the railway network.’

On privatisation, the TAC accounting framework for both freight and passenger traffic was poorly constructed and failed to reflect fully the costs born by rail operators. The regulator noted that ‘[the railway industry] was privatised in a hurry, with inadequate attention paid the fitness for purpose of the regulatory and contractual matrix ….’ In particular, the regulator noted that the freight charging policy should provide ‘… greater transparency and predictability for freight operators … and help the industry as a whole to respond to the challenge of increasing rail freight share of the overall freight market.’

Additionally, the regulator called for a revision in TACs in support of the government’s 10 year transport plan,^, which would lead to a ‘more efficient and competitive service from rail freight.’ The regulator believed the revision in TACs was crucially important: ‘… rail freight growth is not just a desirable goal: it is something we must have.’

The key accounting issues are centred on the regulatory change in methodology used to determine greater ‘transparency’ and ‘predictability’ of the TACs paid by private sector FOCs. There also exists the associated issue of the extent to which public monies should be used to reduce the level of these TACs within the context of the state regulatory framework and the need to meet government growth targets in freight traffic. There is an additional need to identify and examine the effect of the reduction in the level of the TACs on the net earnings of some of the leading FOCs.

In general, although the objectives of both these regulatory organisations have been clearly defined by legislation, the recent financial and operating indicators of the overall rail privatisation process have not met most of the statutory objectives or delivered net positive benefits to either the rail passenger or to the state.