MrJeeves
Established Member
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:
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
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