So far, the 21st century has been a golden period for rail in Britain – passenger numbers have grown each year, even through the 2008 recession. This has given governments in Britain the confidence to invest in rail as a way to enable economic growth, with major projects including Great Western electrification and Crossrail under way and commitments for new trains in the Northern and Trans-Pennine Express franchise awards.
However this virtuous circle of economic growth, passenger demand and investment may be threatened by the Brexit decision.
Key drivers of passenger demand have been economic and population growth. Population and travel demand have increased particularly in London, in part through freedom of movement of labour, attracted by the availability of jobs and fuelling economic growth.
Increasing population in cities has pushed up house prices, forcing people to move out of the city and commute from surrounding areas, increasing travel distances.
One of the immediate effects of the Brexit vote was that housebuilders' share prices dropped, reflecting a market belief that a cut in immigration and an economic downturn will reduce housing demand. Reduced housing demand would imply that population, property prices and therefore travel demand will be less than previously predicted.
If passenger demand does not grow as predicted, nor will passenger revenue, which will reduce the value of franchises. The announcement of the winner of the Greater Anglia franchise due on 26th June 2016 has been delayed, with Secretary of State Patrick McLoughlin saying that “he won’t keep everyone waiting too long”. The delay is not in choosing the winner but in renegotiating the value of the franchise, which runs services into Liverpool Street that are heavily used by City commuters.
Existing franchises such as Northern and TPE, which were awarded on the basis of a strong growth profile with commitments for a lot of new trains, may run into financial difficulty and in the worst case ‘hand back the keys’. There may be even greater emphasis on cost reduction, which would impact customer service. For new franchises less growth means a lower appetite for risk, fewer bidders and less investment in the bids, and so the taxpayer will receive a lower premium or have to provide a greater subsidy.
A major contributor to UK economic growth has been that many global companies have been attracted to invest in Britain as a way of getting into Europe – for example, international banks based in the UK have been able to operate in all EU countries. These companies make their investment decisions globally; Britain outside the EU is a less attractive prospect for investment, so they may plan future expansion in other European countries rather than the UK. This drop in inward investment would affect both manufacturing (including rail, eg Hitachi) and financial services jobs in the UK, depressing economic activity, and further reducing passenger demand.
Clearly Britain will try to negotiate free access to the single market, including the financial services passport, but the price may be free movement of labour, which may be too high.
The exchange rate for the pound sterling has dropped, so imported goods will cost more. If the UK is unable to negotiate trade deals with the EU and other countries that are as good as those in place today, some imported goods may attract a tariff, further increasing prices. These would both have an inflationary effect, so annual fares increases, which are currently linked to RPI, may be higher.
Higher inflation would also increase fuel and energy prices for train operating companies, and Network Rail costs for enhancement projects.
On the other hand, a lower exchange rate may make British rail industry suppliers more competitive abroad, but only if British railways continue to follow EU standards and we can negotiate favourable trade deals. However this would not affect British rail services.
The Chancellor has indicated that taxes will have to rise. Currently there is no VAT on rail fares, but fortunately changing this to the standard rate would be electoral suicide.
Rail industry skills
The only downside of the increase in rail investment in recent years has been that costs have shot up due to the limited availability of people with rail experience and skills. This has been a major problem for major rail projects such as Crossrail, and caused the rail development programme to be reset in 2015.
Controls on immigration might make it more difficult for NR to address the skills shortage by recruiting skilled engineers from abroad, so reducing NR’s capacity to deliver projects. New projects may be delayed, as the go-ahead depends on the ability to convince government that the skills are there to manage and deliver the project.
Train operators, particularly TfL, employ many workers from outside the UK. Whilst it is unlikely that they will be forced to leave, some may choose to do so, and may be difficult to replace – which would reduce levels of customer service.
The international ratings agencies S&P and Fitch have both downgraded the UK’s credit rating to AA. This reflects the worsening economic conditions above, and may make it more difficult for the UK to borrow money. This and higher inflation would have the effect of pushing up interest rates.
Higher prices for imported rolling stock (or imported components for rolling stock) and higher finance costs would change the cost balance between buying new rolling stock and refurbishing existing stock, so there may be fewer commitments to new trains in future franchise announcements. This is a factor in the delay of awarding the Greater Anglia franchise.
Higher interest rates and challenging borrowing conditions would make it more difficult and expensive for the government to fund major new infrastructure projects of all kinds. A reduction in passenger demand would make it easy for the government to cut back, delay or cancel rail projects such as HS2, Crossrail 2, and Northern Powerhouse Rail, which Railfuture consider are necessary to enable continued economic growth. The National Audit Office has just asked HS2 to consider delaying opening of phase one, whilst the decision on a new runway at Heathrow or Gatwick has been postponed until the new Prime Minister is in place.
What this means for rail users
The rail system, like the national housing stock, will still need investment to cope with existing demand.
Uncertainty is inevitable whilst the terms of Britain’s exit are being negotiated with the EU, but it is unlikely that all the doom-laden predictions will come true; indeed, some commentators believe that Britain’s economy will bounce back quickly. There will be delays whilst investment decisions are reviewed. Whilst there will be no immediate effect on train services, in the medium term increasing cost pressures may cause rising fares, increased overcrowding and reduced customer service. On the other hand the rebalancing of the economy that will occur in the long term may result in less of a ‘two-speed economy’ between London and the rest of the UK, which would take some of the heat out of the current overcrowding of commuter services.
Transport is key to economic growth, so it is essential for the UK economy that the government shows confidence in the future, and continues to make the big investment decisions – which will have the effect of reducing uncertainty.
The way forward
Therefore Railfuture welcomes the speech by Secretary of State for Transport Patrick McLoughlin on 28th June, stating that investment in infrastructure is now even more important, so that the UK is seen to be open for business and building the infrastructure it needs. He drew the comparison with 2010, when George Osborne took the decision to continue with Crossrail rather than taking the temptation of using that funding to pay down debt. At the other end of the scale he highlighted the opening of Kirkstall Forge station at the weekend, which is the catalyst for a £400m private sector investment in new homes and a business park in the area.
Railfuture will campaign for a continued high level of rail investment, giving priority to the projects which will stimulate economic growth.
Rail development reset
Brexit and the Railway
Speech by Secretary of State for Transport: Investment in infrastructure is now even more important