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National Express goes off the rails
THE NEWS that National Express has walked away from its east coast rail franchise comes at a time when most other tocs (train operating companies) are experiencing a drop in revenue due to the recession. Transport secretary Lord Adonis has temporarily nationalised the line prior to a future resale.
The company will only be exposed to a debt of £72 million even though it negotiated a contract with the Department for Transport to pay back £1.4 billion for the franchise up until 2015. This is because National Express set up a separate company, a special purpose vehicle called 'National Express East Coast', which means that National Express itself will not have to carry any liabilities or face any financial penalties.
The company did offer £100 million rather than the original £72 million but this was turned down by the government on the grounds that it could be construed that a toc could be courting favour!
However it is public money that will be used to cover the shortfall, putting major rail upgrading works at risk - including electrification of the Midland and Great Western main lines.
Under rail privatisation, companies make a bid for a franchise anticipating that revenues will rise, allowing the company to pay back to the government a set amount of money called 'premium payments'. The tocs receive huge government subsidies - £800 million was paid out to the top eight companies last year - so the idea that these companies will pay back the subsidies by way of premium payments looks good for the government's accounts.
In the case of the east coast main line, National Express anticipated an annual increase of 10% in revenue allowing them to pay back £55 million for this year (£1.4 billion for the whole eight year contract) but this year the increase in revenue was only 3%, meaning that the company would have to make up the shortfall itself or, as National Express decided to do, hand back the franchise to the government.
Other tocs are also experiencing huge drops in revenue, such as Stagecoach who run South West Trains and have a liability of £1.2 billion. They too may also walk away without being penalised.
Several other companies have the so-called 'cap and collar' arrangement in force and this is used to stop tocs from receiving windfall gains (the cap) while protecting the companies from the severity of recessions (the collar). The arrangement is written into most of the contracts that are awarded to the tocs and comes into force after five years of running a franchise (in the case of National Express the cap and collar clause would not come into effect until 2011).
The cap and collar clause means that the government steps in and pays up to 80% of any fall in projected revenue that the rail franchise incurs and this year the amount of money being paid out by the government to the tocs will be around £500 million.
The rail network costs the taxpayer three times more than it did under publicly-owned British Rail, and fares in Britain are the most expensive in Europe. Privatisation of the railways has allowed big business to extract huge profits from the system while using public money to underwrite any losses.
The government has been forced to step in to save Railtrack and Metronet in the recent past because private enterprise is unwilling and incapable of funding the huge amount of investment required to run a public transport system. The Socialist Party calls for the complete renationalisation of the whole transport system run under democratic workers' control.
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