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Ministers are preparing to allow private train companies in England to make greater profits if they succeed in boosting passenger numbers that were hit hard by the Covid pandemic.
The transport department is holding talks with operators to reopen their contracts and introduce an incentive to boost passenger revenue as soon as next month, according to industry executives and government officials.
The government stepped in to save the industry from collapse when the pandemic struck and assumed all financial risk by shifting train companies on to tightly controlled contracts that paid a fixed management fee.
This de facto renationalisation ripped up the franchising model introduced after privatisation in the 1990s, which had put full revenue and cost risk on each operator and had led to a series of failures, including three times on the east coast main line.
Passenger numbers are still 10 to 20 per cent below pre-pandemic levels, equivalent to a daily revenue loss of £8mn compared with 2019 levels, according to the latest government figures. The loss of higher-fare paying business travellers and commuters has hit the industry finances particularly hard.
Rail bosses have urged ministers to give them commercial incentives to grow traffic, generate more revenues and allow them to increase their profits, instead of focusing on cost-cutting to reduce the industry’s reliance on the billions of pounds of state subsidies.
Transport secretary Mark Harper told MPs on the House of Commons transport select committee earlier this week it was “imperative” that the industry could focus on “getting more passengers and driving up revenues”.
He added: “There are only two ways you can make the rail industry sustainable. You either drive up revenue or you reduce costs. And taking costs out means reducing services.”
Under existing arrangements each operator is paid a fixed fee of 0.5 per cent of its operating cost base, with the chance to earn an additional 1.5 per cent if it hits performance targets ranging from punctuality and cleanliness to efficient financial management.
One option to incentivise passenger growth would be to redraw these performance targets to focus more on growing ticket revenues, one person familiar with the matter said.
The planned contractual changes were expected to part of deeper reforms of the rail industry which appear to have stalled.
Two years ago, the government pledged to bring private train companies and the state-owned infrastructure operator, Network Rail, together in a new public body to be known as Great British Railways. But Harper told the committee that the necessary legislation was “unlikely” to make it through parliament before the general election, which is expected next year.
There are 17 train operating companies in England, of which four are fully nationalised and operated by the government.
