Labour to end profit incentive for rail operators in run-up to nationalisation

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Ministers plan to end a scheme that allows private train companies in England to make extra profits, as the government prepares to fully nationalise the railway network.

The Department for Transport has told operators it will not renew an incentive scheme that enables groups to take a share of the profits if they grow passenger revenue above an agreed benchmark, according to three industry executives. 

The arrangement, known as the “revenue out-turn mechanism”, was introduced last year by the previous Conservative administration and is due to expire at the end of March 2025.

The policy was designed to encourage companies to look beyond their contractual obligations, which are to run their trains to a series of strict operational requirements, and focus as well on growing passenger numbers.

The decision comes as the new Labour government pushes ahead with nationalising passenger rail, a process that is set to gradually transfer train operators to a new public body called Great British Railways over the next five years.

Several industry bosses said the decision to end the profitmaking incentive appeared to be “ideological”.

The scheme was comparatively small in the context of the more than £10bn in fares collected by operators each year, one of the bosses said, yet had still raised hundreds of millions of pounds in extra revenue for the public purse. 

But government officials said it was hard to find a direct link between higher revenue and the incentive scheme since it was introduced, and that train companies had not significantly changed their business practices because of it. 

The previous government stepped in to save the industry from collapse when Covid struck and assumed all financial risk by shifting train companies to tightly controlled contracts that paid a fixed management fee.

Under the post-pandemic contracts, every major decision taken by operators, from timetabling to orders for rolling stock, must be agreed by civil servants in Whitehall. 

This de facto renationalisation ripped up the franchising model introduced after the privatisation of the network in the 1990s, which put full revenue and cost responsibilities on each operator but had led to a series of failures. 

Currently, the government pays operators a fixed fee of 0.5 per cent of their operating cost bases, with the chance to earn an additional 1.5 per cent if they hit performance targets ranging from punctuality and cleanliness to efficient financial management.

Since the industry has stabilised following the pandemic, private companies have been arguing for greater freedom to use their commercial expertise to raise passenger numbers and lower the subsidy the state puts into the railway. 

But the government and unions argue that the privatisation of the 1990s created a fragmented and inefficient system, and that the fees paid to private operators are being wasted. 

The government is set to begin the nationalisation process when the Passenger Railway Services bill receives Royal Assent, expected later this year.

Under the bill, contracts to run train operators let to private companies will be permanently returned to the government as they expire.

There are 17 train operating companies in England, of which four are already fully nationalised and operated by the government.

Great British Railways will eventually unite the passenger operations of the railway with its infrastructure, currently run by public body Network Rail. Ministers believe this will end the fragmentation of the industry caused by the decision to split tracks and trains at the time of privatisation, and create a more efficient and reliable railway.

The DfT said it was committed to driving up rail passenger numbers and the reforms were aimed at doing exactly that.

“This mechanism wasn’t having the desired effect, and is no longer relevant given the major reforms we are making to the system,” a spokesman said. “Going forward we will look to grow revenue in a way that delivers better value for taxpayers’ money.”