ONS exploring classification of DfT OLR TOCs as public sector bodies

[MrJeeves]

The ONS regularly review publicly owned organisations to classify institutional units within the UK to determine which funding and spending rules should apply to that organisation.

LNER went through this process in August 2018, a few months after DfT OLR took over, in which they were found to be a public non-financial corporation. This effectively means a publicly owned company whose primary activity is not dealing in financial assets and liabilities and is a market producer which is subject to control by government. Generally, this is decided based on where the majority of the organisation's revenue originates as well as whether the majority of business costs are met through self-generated revenue. LNER sufficiently shown that the majority of their revenue would arise from ticket sales (essentially ORCATS allocations).

Both Northern Trains and SE Trains Limited have also gone through the same process, and, for both of those TOCs, it was demonstrated that the majority of their costs were covered (or would have been if it wasn't for COVID, for SE Trains) by the revenue they generate.

This quarter, it's TPE's turn!

As set out in March 2024's forward work plan, TPE will be classified at some point between April and June this year. This is the first classification which could truly be considered to be "post-COVID" for all intents and purposes. Rail travel is back at pre-COVID levels (and exceeding them in many cases), and hence current revenue numbers will closely reflect that of future years operating in the industry.

It's difficult to say if TPE would be classified any differently to the other TOCs -- my assumption is not -- but it will be interesting to see how it plays out.

If a TOC is classified as "central government", it means that its finances become part of the parent organisation's (DfT's) balance sheet and hence included on government balance sheets, and spending within the TOC becomes bound by the same rules as central government spend, having to pass cost-benefit tests for any significant spend. If an organisation is defined as this, it is effectively for all intents and purposes considered nationalised.

First TPE's last full accounts (FY 2022/23) show that the majority (57.4%) of TPE's revenue was still provided through non-competitive government funding (£247.3m) compared to ticketing revenue (£183.3m). This is somewhat on the edge of what could be considered a public non-financial corporation.

For closer calls like this, what the ONS also need to take into account is whether the company is economically incentivised to respond to market changes. Essentially this means would TPE run fewer trains if the market desired fewer trains, or would it run more if it desired more.

Will anything come of this? Probably not. The idea that any franchised TOC (let alone OLRs) currently operating is a functional market entity is quite a stretch considering the cost-plus model they currently operate on where all risk is carried by the DfT. But the ONS likely doesn't want the accidentally nationalise the rail industry overnight provided that it's plausible the revenue cases for TOCs will improve in coming months or years.

It's worth noting that ScotRail Trains Limited is already classified as central government, so there is precedent for publicly owned TOCs to be marked as such:

The ONS has undertaken a classification assessment of ScotRail Trains Limited (SRT), which provides services for railway passengers and operates specific railway stations and light maintenance depots. [...] The assessment also concluded that SRT is a non-market producer, in accordance with ESA 2010 3.19, as indications are that less than 50% of its production costs are expected to be covered by sales. As such, SRT has been classified to the central government subsector (S.1311). This decision takes effect from 1 April 2022, the commencement date of the Grant Agreement and the date on which ScotRail services were transferred.

Public sector classification guide and forward work plan - Office for National Statistics

The forward work plan sets out the units and transactions that we expect to assess and classify in the coming 12 to 18 months.

www.ons.gov.uk

 

[snowball]

Wasn't it a similar review ten or so years ago that led to Network Rail being classified as a public body?

 

[Horizon22]

This is the first classification which could truly be considered to be "post-COVID" for all intents and purposes. Rail travel is back at pre-COVID levels (and exceeding them in many cases), and hence current revenue numbers will closely reflect that of future years operating in the industry.

Don't get into the trap of thinking pre-Covid passenger numbers = pre-Covid revenue as, generally, it does not.

 

[MrJeeves]

Wasn't it a similar review ten or so years ago that led to Network Rail being classified as a public body?

Yes, December 2013. I've attached the spreadsheet which contains all bodies currently classified.

Don't get into the trap of thinking pre-Covid passenger numbers = pre-Covid revenue as, generally, it does not.

Indeed, but if that is the case for TPE that would suggest that the revenue is not forecast to improve with a rise in passenger numbers, hence suggesting they may not be considered a public non-financial corporation!

 

[Magdalia]

If a TOC is classified as "central government", it means that its finances become part of the parent organisation's (DfT's) balance sheet and hence included on government balance sheets, and spending within the TOC becomes bound by the same rules as central government spend, having to pass cost-benefit tests for any significant spend. If an organisation is defined as this, it is effectively for all intents and purposes considered nationalised.

I think there is a possible misunderstanding here. Public Non-Financial Corporations are "nationalised" and part of the public sector for statistical purposes. The Public Sector comprises Central Government, Local Government and Public Corporations (financial and non-financial). In particular Public Non-Financial Corporations are "inside" for key economic statistics such as Public Sector Net Borrowing and Public Sector Net Debt.

An institution is in the public sector if it is subject to government control. Below are quotes from the Office for National Statistics list for Network Rail (row 1913) and Scotrail Trains (row 2565) as examples:

the Office for National Statistics (ONS) concluded that because of government’s risk exposure through guaranteeing its debt, Network Rail is a government controlled body and, therefore is within the public sector

The assessment further concluded that SRT is subject to public sector control, for reasons including that SRT is a wholly owned subsidiary of SRH, which is wholly owned by the Scottish Ministers

The spreadsheet says the following for DfT OLR Holdings Limited (DOHL - row 860):

ONS has assessed the classification status of DOHL and has concluded that it is subject to public sector control for reasons including that it is wholly owned by DfT

DOHL has been classified to the public non-financial corporation subsector (S.11001) with effect from 24 June 2018, the date from which it can be established that DOHL was no longer dormant following the Secretary of State for Transport’s decision to bring the Inter City East Coast franchise back into public ownership.

An institution is in Public Non-Financial Corporations (or Public Financial Corporations) if it is deemed to be a market producer. If the institution is not a market producer then it is part of Central or Local Government, as appropriate. But either way, an institution under public sector control is in the public sector.

For closer calls like this, what the ONS also need to take into account is whether the company is economically incentivised to respond to market changes.

Precedent is that, for TOCs that are "nationalised" the ONS look at the percentage of production costs covered by sales as a test for whether each TOC is a market producer. See these for Scotrail Trains and Northern Trains (row 1902):

The assessment also concluded that SRT is a non-market producer, in accordance with ESA 2010 3.19, as indications are that less than 50% of its production costs are expected to be covered by sales

The accounts of the previous Northern rail franchisee, ARN, were used as a proxy for carrying out the market test, and showed that over 50% of ARN’s production costs were covered by sales. As such, NT has been classified to the public non-financial corporation subsector (S.11001)

It is an interesting question as to what might happen for a TOC where close to 50% of production costs are covered by sales.

The ONS make these decisions on the basis of interpretation of international statistical standards notably the System of National Accounts (SNA) and European System of Accounts (ESA).

But the ONS likely doesn't want the accidentally nationalise the rail industry overnight provided that it's plausible the revenue cases for TOCs will improve in coming months or years.

So classification decisions don't happen "accidentally". What ONS "wants" is to be compliant with the International standards.

 

[MrJeeves]

So classification decisions don't happen "accidentally". What ONS "wants" is to be compliant with the International standards.

I don't mean that the decisions are automatic, but that deeming a franchised TOC to be classified as central government will effectively be akin to nationalisation.

 

[Magdalia]

I don't mean that the decisions are automatic, but that deeming a franchised TOC to be classified as central government will effectively be akin to nationalisation.

But franchised TOCs are not under government control. They have boards of directors and shareholders with autonomy of decision. In particular they can walk away from the franchise and hand over to DfT OLR Holdings Limited.

 

[Bletchleyite]

But franchised TOCs are not under government control. They have boards of directors and shareholders with autonomy of decision. In particular they can walk away from the franchise and hand over to DfT OLR Holdings Limited.

I do find it curious how people seem to think being on a cost-plus contract* makes something nationalised. The revenue risk is taken by Government, but it's not nationalised any more than a bus company running an unremunerative service on a cost-plus contract is. Whether something is nationalised is simply based on whether 100% of the share capital is owned by HMG or not.

* That is, where the contracting organisation takes the revenue and pays the full cost of operation plus an element of "reward" for operating it (the latter being the profit).

 

[43066]

Don't get into the trap of thinking pre-Covid passenger numbers = pre-Covid revenue as, generally, it does not.

We do need to stop endlessly comparing to pre Covid, and what revenue should be. We’re in a different world now.

 

[CharlieSpotted]

Don't get into the trap of thinking pre-Covid passenger numbers = pre-Covid revenue as, generally, it does not.

Apologies if this is obvious, but perhaps worth asking, why don't increased passenger numbers = increased revenue?

 

[43066]

Apologies if this is obvious, but perhaps worth asking, why don't increased passenger numbers = increased revenue?

Fewer peak time travellers, fewer high value season tickets being bought etc. mean that less is earned for a given number of travellers. Of course focussing only on the cost v revenue without considering wider economic impacts ignores why the railway exists in the first place.

The government has also chosen to reduce fares in real terms, while simultaneously complaining about reduced revenues, which is rather ironic!

 

[Bletchleyite]

The government has also chosen to reduce fares in real terms, while simultaneously complaining about reduced revenues, which is rather ironic!

There's no "reducing fares in real terms" going on on LNER! Since COVID off peak return fares have increased by about 20% and on the Edinburgh route the increase is looking nearer 50% or more.

 

[43066]

There's no "reducing fares in real terms" going on on LNER! Since COVID off peak return fares have increased by about 20% and on the Edinburgh route the increase is looking nearer 50% or more.

That increase-by-stealth, which of course is what it is, is just at that one operator, though.

The march 2024 increase in regulated fares was capped at 4.9%, way below RPI in July of last year (circa. 9%) which is traditionally used to calculate it.

 

[DarloRich]

What is the practical impact of these discussions or decisions?

why don't increased passenger numbers = increased revenue?

because they are not buying the same tickets for the same prices. There is higher weekend leisure travel, different travel times/patterns during the week and vastly reduced business and commuting/season ticket traffic

 

[Goldfish62]

We do need to stop endlessly comparing to pre Covid, and what revenue should be. We’re in a different world now.

Indeed. And in any case passenger numbers aren't at pre-Covid levels as the OP claims and revenue is even further behind.

 

[Horizon22]

We do need to stop endlessly comparing to pre Covid, and what revenue should be. We’re in a different world now.

I’m not comparing it, I’m just saying a lot of people assume it’s equivalent (as some have indeed done in this thread) when it isn’t.

Essentially the railway / rail travel isn’t quite the same captive market it once was with more alternatives for certain people. All to bear in mind for the DfT & ONS.

 

[Clarence Yard]

But franchised TOCs are not under government control. They have boards of directors and shareholders with autonomy of decision. In particular they can walk away from the franchise and hand over to DfT OLR Holdings Limited.

Yes they are, by the nature of the NRC. The TOC boards have autonomy of decision as far as their management functions go but the key decisions are now taken by the DfT.

All DfT TOCs were reclassified as public non-financial corporations in 2020 when all the franchises were effectively terminated and I am not aware there has been a reclassification since. I believe the ONS just review a TOC if there has been a change in TOC ownership.

The effective date of reclassification was backdated to 01/04/20 and there was an ONS press release a few months afterwards which listed all the UK TOCs involved.

And yes, nowadays the Treasury are all over any TOC investment proposals!

 

[Magdalia]

Yes they are, by the nature of the NRC. The TOC boards have autonomy of decision as far as their management functions go but the key decisions are now taken by the DfT.

All DfT TOCs were reclassified as public non-financial corporations in 2020 when all the franchises were effectively terminated and I am not aware there has been a reclassification since. I believe the ONS just review a TOC if there has been a change in TOC ownership.

The effective date of reclassification was backdated to 01/04/20 and there was an ONS press release a few months afterwards which listed all the UK TOCs involved.

Thanks for this.

Only the TOCs that come under DfT OLR Holdings Limited are explicitly named in column A of the ONS spreadsheet attached at #4.

I have now found Train Operating Companies in England and Scotland operating under Emergency Measure Agreements, in row 3040. Unfortunately none are listed explicitly with their names appearing in column A of the spreadsheet, so the audit trail is not very clear.

I have looked on the ONS website for July 2020 and still not been able to find the News Release.

The spreadsheet says the following in column I row 3040:

ONS has assessed the classification status of TOCs operating under EMAs and has concluded that they are subject to public sector control for reasons including that most of the revenue and cost risk associated with rail travel has been transferred to the public sector, and because the EMAs place restrictions on TOCs’ ability to borrow and take key decisions relating to their corporate policy.
The assessment also concluded that TOCs are market producers as they compete against other producers of transport, and have covered more than half of their operating costs through market output over the last three financial years. As such, TOCs have been classified to the public non-financial corporations subsector (S.11001) with effect from 1 April 2020, the date the EMAs came into force.
The TOCs affected by this classification decision are: Avanti West Coast; c2c; Caledonian Sleeper; Chiltern Railways; Cross Country; East Midlands Railway; Govia Thameslink Railway; Greater Anglia; Great Western Railway; Scotrail; Southeastern; South Western Railway; TransPennine Express; and West Midlands Trains.

Each one is named, but it is necessary to know where to look!

 

[Clarence Yard]

ONS press release of 31/07/20 lists all the TOCs.

If you google ONS rail classification, you should find it easily.

 

[Meerkat]

Of course focussing only on the cost v revenue without considering wider economic impacts ignores why the railway exists in the first place.

In the first place the railways were built to make profits.....

 

[43066]

I’m not comparing it, I’m just saying a lot of people assume it’s equivalent (as some have indeed done in this thread) when it isn’t.

Essentially the railway / rail travel isn’t quite the same captive market it once was with more alternatives for certain people. All to bear in mind for the DfT & ONS.

Yes appreciate you weren’t. The whole “revenue is less than forecast/less than pre Covid” thing has been used as a bit of a stick to beat the industry with. Ultimately we just need to get on with things now.

In the first place the railways were built to make profits.....

Yes, and they weren’t very good at it. That also has next to no relevance to why most of the railway continues to exist in 2024.

 

[Meerkat]

Yes, and they weren’t very good at it. That also has next to no relevance to why most of the railway continues to exist in 2024.

Its pretty relevant because much of it (in route mileage) wouldn't exist otherwise. It wasn't built for social reasons, and a fair bit of it still exists for political reasons rather than real utility.

 

[43066]

Its pretty relevant because much of it (in route mileage) wouldn't exist otherwise.

It was built for profit in the mid 19th century, but that has scant relevance for the reason it still exists nearly two hundred years later, as the world has changed somewhat since.

The reason the railway remains in existence, and is subsidised, is for its wider benefits, rather than because it generates a profit overall as a system (notwithstanding that some routes and operators will do so). Hence the political footballism around the railway that this thread (and many others), are concerned with.

a fair bit of it still exists for political reasons rather than real utility.

If it didn’t have “real utility” there wouldn’t be a political consensus in favour of retaining it.

 

[TUC]

Both Northern Trains and SE Trains Limited have also gone through the same process, and, for both of those TOCs, it was demonstrated that the majority of their costs were covered (or would have been if it wasn't for COVID, for SE Trains) by the revenue they generate.

Public sector classification guide and forward work plan - Office for National Statistics

The forward work plan sets out the units and transactions that we expect to assess and classify in the coming 12 to 18 months.

www.ons.gov.uk

Of all the TOCs it sounds highly unlikely that most of Northern's costs are met by revenue. Something smells accounting-wise.

 

[MrJeeves]

Of all the TOCs it sounds highly unlikely to most of Northern)#costs are met by revenue. Something smells accounting-wise.

Northern were classified in March 2020 based on the previous accounts of the privatised franchise (likely 2018/19 but I've not checked).

It doesn't seem unlikely that most costs were met by revenue in that period.

 

[Meerkat]

If it didn’t have “real utility” there wouldn’t be a political consensus in favour of retaining it.

That is unrealistic. Closures are politically damaging out of all proportion to the actual utility of the line/station involved. So politicians duck it and you get pointless stations remaining open with a couple of services a day.

 

[43066]

That is unrealistic. Closures are politically damaging out of all proportion to the actual utility of the line/station involved. So politicians duck it and you get pointless stations remaining open with a couple of services a day

Unlikely they they’re “pointless” when they’re situated on lines between busy areas, and cost little to keep open. If they’re underutilised because the service is too sparse, the solution might be to increase frequency rather than close the asset and lose the infrastructure forever.

Let’s not have another pointless discussion about line and station closures. They won’t be happening because, although popular with certain posters in this forum, that’s a niche view that isn’t shared by the wider population. Hence no mainstream political party will implement them .

 

[Meerkat]

Unlikely they they’re “pointless” when they’re situated on lines between busy areas, and cost little to keep open. If they’re underutilised because the service is too sparse, the solution might be to increase frequency rather than close the asset and lose the infrastructure forever.

Let’s not have another pointless discussion about line and station closures. They won’t be happening because, although popular with certain posters in this forum, that’s a niche view that isn’t shared by the wider population. Hence no mainstream political party will implement them .

Exactly - the wider population (who know next to nothing about the situation), via the politicians, stop the railway making efficient decisions.

 

[43066]

Exactly - the wider population (who know next to nothing about the situation), via the politicians, stop the railway making efficient decisions.

More likely because the decisions you personally favour aren’t considered “efficient” by those in the know, who are actually charged with making the choices?!

In any case what you’ve described above: operating a token service to a station, then arguing for its closure due to said pointless service, is causing and then managing decline, rather than anything to do with efficiency.

 

[Meerkat]

More likely because the decisions you personally favour aren’t considered “efficient” by those in the know, who are actually charged with making the choices?!

In any case what you’ve described above: operating a token service to a station, then arguing for its closure due to said pointless service, is causing and then managing decline, rather than anything to do with efficiency.

Those stations have @ token service because politics stops them being closed. It’s inefficient using railways as local bus services.