The fallout from the Referendum vote that will result in the United Kingdom leaving the European Union presents a number of challenges but also a number of opportunities for the railway industry.

Whilst the consequences of the Brexit vote may take some time to work themselves into UK policy and legislation the consequential political changes could have a more immediate effect. A new Prime Minister, a new Chancellor of the Exchequer, a new Secretary of State for Transport, all from the right of the Conservative Party, creates the possibility of some changes in direction in rail policy. Whether the previous administration’s enthusiasm for rail (and rail’s ability to consume considerable public funding) remains to be seen.

Philip Hammond’s early comments in office appear to support his predecessor’s view on infrastructure investment, especially its ability to improve connectivity. He has stated that “investment, particularly in transport infrastructure, to allow the potential of our northern cities to be realised is a crucial contribution to the overall prosperity of the economy going forward, and I believe that those big infrastructure projects are going to be key to Britain’s future.”[1]

This suggests that the Government will press on with HS2 given that in the past Theresa May has supported the new line; Philip Hammond, when Transport Secretary in 2011, spoke in favour of the High Speed Line and Chris Grayling has voiced his support for the project in post reshuffle interviews.

However both Hammond, from his time as Transport Secretary, and Grayling are known to be keen on pursuing efficiency in the rail industry. Although Sir Roy McNulty’s ‘Realising the Potential of GB Rail, Report of the Rail Value for Money Study’ report (May 2011) was commissioned by the Labour Government Philip Hammond, when Transport Secretary, supported its findings. During his time as Shadow Transport Secretary Chris Grayling took a close interest in the efficiency of the rail industry in general and Network Rail in particular. We may, therefore, anticipate a renewed interest in industry efficiency and whether the franchising bill represents value for money. David Cameron’s administration had given tacit support for challenging working practices in the industry. This is likely to be maintained in the new regime.

The Department for Transport's Response to the PR18 Initial Consultation Document seems to bear this out. The DfT wants to focus on steps that can reasonably be taken to improve the capacity and performance of the existing network, rather than unduly focus on expansion. It also wants to work with the ORR and industry to create stronger, sustainable commercial incentives for efficiency.

Turning to the potential impact of Brexit, and the resulting political changes, on the railway industry we have taken the Shaw Report recommendations and considered how they may be affected.

Some recommendations will still hold good:

  • R1. Place the needs of passengers and freight shippers at the heart of infrastructure management;
  • R5. Plan the railway based on customer, passenger and freight needs; and
  • R7. Develop industry-wide plans to develop skills and improve diversity.

These calls have been made by various industry reports over the last twenty years and a change in administration is not going to diminish the appetite for greater accountability from the infrastructure manager.

The recommendations relating to devolution require further consideration:

  • R2. Focus on the customer through deeper route devolution, supported by independent regulation; and
  • R3. Create a route for the North.

Whilst Philip Hammond has recognised the importance of infrastructure investment in the north it is not yet clear whether the revamped administration will favour further devolution. The Prime Minister took an early opportunity to emphasise the importance of the Union and whilst this may mean additional powers for the Scottish and Welsh administrations this does not necessarily translate into devolution for the English Regions. A key factor will be the effect of regional devolution on the Government’s finances. Whilst the appointment of a new Northern Powerhouse Minister, Andrew Percy, shows at least a public commitment to continue the policy championed by George Osborne, it remains the case that if there is to be a squeeze on public finances it is unlikely that Whitehall would want to relinquish control of a key spending area. It is therefore crucial that the case for devolution is even more strongly made and is supported by a unified regional voice.

Potentially the most interesting effect of the Referendum will be on financing the industry. Shaw’s Recommendation 6 stated:

  • R6. Explore new ways of paying for the growth in passengers and freight on the railway.

Whilst the pre-referendum hyperbole of emergency budgets and a stock market crash has not been born out by events there is still widespread concern that Brexit will reduce economic confidence and the demand for rail travel. Whilst the last recession had only a limited impact on passenger numbers there are now a number of reports that passenger growth has slowed significantly and on the long-distance routes stopped completely. Any negative impact of Brexit on London’s economy could result in a reduction in commuting numbers. The rail freight sector is suffering with coal volumes virtually ceased, steel carryings little better and limited profitable traffic prospects to replace these core commodities. Whilst increasing trade outside the EU may increase deep-sea container volumes this traffic produces very low profit margins and may be hit by the weakness of the pound.

Of equal concern to the effect of an economic downturn on traffic volumes is the effect on funding. The railway industry has enjoyed a period of Government support not seen for many years but there has been evidence that the screws are tightening. Given the scale of the current investment programme, with a pipeline stretching beyond 2020, it is hard to see any appetite for increased funding and it is possible that schemes could be further slipped, although the DfT's stated focus for the next HLOS will include meeting the Government's commitments to existing projects and also projects that are deemed critical to prevent serious deterioration in/disruption to passenger or freight services. There is a feeling of consolidation and efficiency rather than expansion.

Given these developments the appetite for introducing other sources of funding is likely to increase even though sources close to Government have said that the industry cannot take for granted the investment appetite of global companies.

The Shaw report identified three levels at which new funding approaches could be introduced into the industry’s infrastructure: at infrastructure parent company level, at route level; and for specific projects. The report stated that ‘for the foreseeable future, Network Rail ownership will remain in the public sector’. Whilst the privatisation of the whole of Network Rail would be a bold political step this is something that the new political team of May, Hammond and Grayling could consider.

A less controversial approach would be to build on the Shaw Report’s recommendation to introduce private financing at a route level. Shaw proposed a hybrid concession model between the traditional regulated asset ownership and the letting of a conventional concession. Leaving the European Union provides an opportunity to take this recommendation further.

Depending on the departure terms finally agreed by the UK with the European Union the Government could repeal those elements of the original Railways Act, which implemented the vertical separation of the industry. This would pave the way for full-scale privatisation of self-contained routes or geographical parts of the industry. Besides introducing funds into the industry it would also create a genuine efficiency comparator between different parts of the railway network, which would me more difficult if all routes remained under Network Rail’s control. This would appeal to the ‘Value for Money’ advocates now in political power.

[1] interview on LBC 14/7/16

Paul Hirst

Paul Hirst

Partner, Global Infrastructure and Co-head of Transport
United Kingdom

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