What rail freight needs to survive and thrive

Paul Clifton hears from train operators, container port owners and supply chain experts about the paths that the government and the freight companies will need to take to help grow the sector.

All the main political parties favour an increased role for rail freight. They’ve all said so, although they’ve been less forthcoming about exactly how that ambition will be achieved.

Labour wants freight to remain in the private sector, along with open access operators. The signs for the sector are therefore encouraging.

But in real terms, carrying freight by train is getting more expensive, while road lorries continue to benefit from a 14-year freeze in fuel duty (fuel is the sector’s greatest cost).

It is not a level playing field. And one thing is clear: no election-winning politician will increase the amount of money handed to the railway.

That means change must come by levelling that playing field, according to the freight operating companies. They believe that can be done by changes to track access rights and to the amount they pay Network Rail for that access.

DP World, which operates Southampton’s container terminal, is already encouraging modal shift by levying a £10 fee on every container that goes by road, and using that fee to lower the cost of each container that goes by rail.

Meanwhile, it is nearly a year and a half since the Chartered Institute of Logistics and Transport (CILT) came up with a lower-cost plan to electrify key freight routes, with added benefits for passenger services.

The link to London Gateway could be wired for £8 million, which it called “the lowest of low-hanging fruit”.

Its entire project, covering 95% of UK rail freight, could be completed for £1.9 billion, roughly the same cost as the A303 road tunnel past Stonehenge.

It would equate to 100 million lorry miles a year, or two million train miles. Since then, CILT finds that “no visible progress has been made”.

What can the rail freight sector reasonably ask of an incoming government?

Tim Shoveller, who heads Freightliner, is in a unique position. For many years, he ran passenger services. He was managing director of South West Trains. Later, he ran a large chunk of Network Rail as a regional leader. Now he operates both freight trains and hundreds of trucks.

“It would be obscene to go to the government with a begging bowl for more money,” he tells RailReview.

“The NHS, the schools, the country’s fabric is clearly in huge distress. If we ask for more at the expense of others, we don’t deserve to get a hearing.

“We need to make the money we already have work harder. The changes we need can be funded within the current industry budget.

“Everyone knows growing passenger revenue is the right thing to do. It cannot come at the expense of freight, so facilitate faster freight. That is the sweet spot that allows passenger revenue to grow, and rail freight to grow. That requires new bi-mode locomotives that accelerate and run much faster, releasing a lot of capacity.

“But I can’t pay for that myself. I’m not aware of any rail freight company paying dividends to its shareholders. You can see from our accounts that we are not making money. If I don’t make money, I cannot buy expensive locomotives. That is not tenable if we want freight to be sustainable. Customers won’t pay more. The competition with road is so acute that everyone is losing.”

This is where structural adjustment led by government is required, says Shoveller.

He warns that the Draft Bill to reform the industry structure, which is going through government scrutiny, requires change.

“We absolutely support the principle of Great British Railways. But there are some things in that Bill that are not quite right. In particular, the track access rights that freight operators have must remain sacrosanct.

“The Bill currently provides for the Secretary of State to instruct the ORR [Office of Rail and Road] to determine something, or indeed to override the ORR. In the context of access rights, that destroys my ability to borrow money and invest.

“How do I invest in a new freight terminal if I don’t know that I will have train paths to serve it, should the Secretary of State decides to do something else with those paths?

“I have no rights, or my rights have been severely restricted, and therefore I cannot borrow any money.

“If they want private sector investment, then they must ensure, like landing slots at Heathrow, that track access rights for freight are protected - and ideally enhanced.

“The longer the track access rights are for, the more I can borrow. At the moment, they are for five to ten years. If government said ten years is a minimum, then I can borrow more money.

“Our Class 66 locomotives are getting towards 30 years old. New bi-mode electric locomotives cost three times what a Class 66 costs to run. If I am to invest, I increase my locomotive cost by at least a factor of three.

“I can’t afford that. No freight company is making any serious profit. I have no pips to squeeze. The only way that sort of investment can be viable is if I have the track access rights to secure those locomotives against.

“That is the single most important requirement for Freightliner from a new government.”

Shoveller’s second requirement of government is a tougher nut to crack. He wants the playing field against road freight to be levelled.

Fuel duty has not increased for 14 years, driven largely by the political desire not to antagonise owners of the UK’s 40 million private cars. Nearly every motorist is also a voter.

“That means the government is subsidising road freight,” says Shoveller.

“Meanwhile, track access charges have increased each year by the Retail Price Index [RPI].

“If they want to freeze fuel duty, that’s fine. But put track access charges to the same level they were 14 years ago, please. Then I can compete.

“Fuel is the biggest variable for road hauliers. Track access is our biggest variable. You can’t hold one steady and allow the other to increase by RPI, and expect any outcome other than road freight getting cheaper and rail getting more expensive. You either tax lorries more… or bring our charges down. We would like to see track access charges drop by 50%. Put them back to where they were.

“The good thing for government is that costs practically nothing to Great British Railways. Network Rail’s total income from freight is 1%. Reducing track access charges is no more than a rounding error in Network Rail’s finances.

“It is affordable. It would fundamentally change our competitiveness with road freight. We would stand a chance.”

There is little difference in the attitude of the two main parties towards rail freight. Both are positive. Does Shoveller think that positive language will transfer into action? Or are they just words?

“There is more the government could do. Nine per cent of UK freight travels by rail. In Germany, it is 19%. Do those two key changes, and we will grow up to 19% - and double rail freight.

“In Germany, the cost of the electricity for freight trains is held to the same price as diesel. That’s a really pragmatic solution. It doesn’t cost a lot of money, but it would mean I could invest.

“At the moment, it is cheaper to use a diesel engine than it is to use an electric engine. The electric engine not only has environmental benefits, it is much better for the railway as a whole. Electric trains break down less often - they are two to three times more reliable than diesel trains. Freight trains don’t break down very often. But when they do, the railway stops.

“And electric trains accelerate much faster. You can solve the East Coast timetable problem if you use electric freight instead of diesel freight.

“If the trains on the ECML used electric traction, they would go along the network quicker, and get off the other end quicker, so the impact on passengers would reduce. My train planning team reckon this alone would solve the East Coast problems.

“Electric locomotives are £6m each to buy. There would have to be an incentive to the freight operators to use electric power, so create one! In the big picture, this is not expensive stuff.

“It would not take long to get more bi-modes. Think about the West Coast Main Line, where capacity is a big issue, and will become an even bigger issue when what’s left of HS2 opens. A Class 66 train that we, GB Railfreight or Direct Rail Services use goes over Shap at 24mph. A Class 90 goes over at 75mph.

“The value of electric freight is in the released capacity for the rest of the network. This doesn’t mean building new railway - it means making today’s network run better.

“It would make room for the passenger market to grow.”

GB Railfreight doesn’t always see eye to eye with the other freight operating companies - they are competitors, after all. But on the agenda for an incoming government, they’re all on the same page.

“Labour and the Tories have both talked a good story about the growth of rail freight,” says GBRf Chief Executive John Smith.

“They wouldn’t say anything less, would they? No one is going to say rail freight is a bad thing. No one is going to say more freight should go by road.

“But the structure is not really there. We look for a framework that gives freight a security of tenure. A key relationship for us is our commercial contract with Network Rail, a structure that maintains our rights of access.

“From what I have seen, Great British Railways will have far more power in terms of how a timetable is written. I can only assume that the Operator of Last Resort will be subsumed within GBR.

“Take the East Coast timetable debacle. In 2016, the Government said it would invest to get more trains on the route. More recently, everyone on the route overlaid the passenger train demand, but forgot about us. It was only very late on that they suddenly realised that, when freight was added in, the whole thing didn’t work.

“We have a legal right on the route. The Regulator acts as the police body around our right to be there. Arguably, in the new structure, we wouldn’t have that.

“Normally, a private business would not want to be overly regulated. But we are dealing with a monopoly supplier, and with GBR we will be dealing with a bigger monopoly supplier that is also trying to run passenger trains.

“Why would it have any interest in us, unless we are protected by a legal right? I am looking for that to be far more robust.”

Smith says the structure that has existed since privatisation 30 years ago “kind of works”. It has led the private sector to invest in freight. But if the multi-national consortia that own the freight companies cannot see long-term permission to run services over the network, they won’t stump up the money to buy new locomotives.

“We’ve taken a leap of faith and leased bi-mode locomotives,” he says.

Thirty new Class 99s are on order from Stadler. The first will arrive mid-2025 and start work in 2026. Others will then be delivered at a rate of two a month, financed by Beacon Rail.

“We still benefit from red diesel. If I were a government short of money, I could remove red diesel and claim environmental benefit, meaning we pay the same price as road diesel. Because that would make electricity relatively cheaper, therefore forcing us to buy electric traction. Just make diesel too expensive for us!

“We could milk the 25-year-old Class 66 diesel fleet until it falls to bits, stop business development, strip the company of cash, pay dividends to our shareholders, and go.

“Or we could decide that we are going to be here in 20, 30 or 40 years’ time, when the sustainability agenda will be even more important. Choosing the second option, the need to buy electric locomotives, is obvious.”

Freight companies don’t receive public money to run trains, but they do run over publicly funded track. Smith says there is a need to fund more effective capacity, including electrification of key routes and small new infrastructure such as passing loops.

“Lorries are not paying for the two grooves they gouge in the slow lane on the A14 through their road tax. There is indirect subsidy to road freight there.

“There’s a reason why the charge for HGVs on the M6 toll road is so high that lorries choose not to go down it. It’s because the damage they would do far outweighs the toll they would pay.

“And we’ve got to get the power supply. You’ve heard the rumours of the lights dimming in Morpeth and Lockerbie when trains go through? They’re well-founded because the wires were put up cheaply - the green agenda has to be paid for.

“But if you back rail freight, you back a slam dunk. We have challenges, but underlying it is an inevitable upward trend.

“The whole market is worth £1bn-£1.2bn between the lot of us. While the total figure is flatlining, it masks some very positive trends. Coal used to be a quarter of it. We have managed to replace that 25% with other traffic.

There are some real innovations - carrying concrete tunnel segments, putting things in containers that were previously moved in bulk, DRS moving Tesco goods.

“High-speed parcels: for us, that doesn’t quite work. Varamis is dabbling in that, right at the cheap end. But soon Amazon and the supermarkets will see they have to migrate to rail.

“In 20 years’ time, we have to be taking parcels into the cities using electric traction and delivered via electric vans. Otherwise, we are kidding ourselves about decarbonising.

“We have to lobby intensively to get the right decisions, whoever ends up in government.”

“It’s not rail versus road”

“For us, it is not about rail versus road,” says John Trenchard, supply chain and commercial director at port operator DP World.

“It is road and rail combining to make sensible economic solutions for our customers.”

DP World operates two of the UK’s three largest container ports: London Gateway and Southampton.

“In the past, we have looked for competitive advantage,” says Trenchard.

“That doesn’t work in this space. We have to look for collaborative advantage. There are more people in the supply chain who are willing to lean in a bit, and do the right thing.

“There is a whole load of international regulation coming on carbon reporting - incremental carbon savings. Not just for shipping lines, but also for consumer companies. Whether we like it or not, we will have to do something about this.

“Rail is an immediate way to do it. We have to embrace this in the next five years - there is a window to better utilise the strategic asset of the national rail network. Beyond that, all sorts of new technological things will appear, such as platooning of trucking fleets on motorways. As a decarbonisation driver, rail is the right thing to do.”

The Southampton terminal is experiencing a remarkable turnaround in its rail freight fortunes.

In 2013, one in three boxes coming through the port travelled inland by rail. That reduced each year until, in the first half of 2023, only one in five containers came by train.

DP World chose to intervene to distort the market. Any imported full box coming across the quay now faces a “modal shift charge” of £10. That £10 goes into a pool. If the container is taken by train to a railhead within 140 miles of the port, the pool pays out. For any boxes going a greater distance by rail, the £10 is refunded.

The 140-mile limit was chosen because DP World calculates that as the point where costs between road and rail meet.

“If it is only going by road, there is a cross-subsidy going on,” Trenchard says.

“We have six months of data now, and we have seen the rail percentage go from 21% to 35%. We don’t know whether that will stick, but it is moving in the right direction.

“We’ve taken over 13,000 journeys from road to rail and saved 4,500 tonnes of CO2 - not with a technical innovation, but merely by differently utilising the supply chain assets that already exist, and letting customers make a choice about road or rail.”

Trenchard says the 4,500 tonnes equate to the emissions of two million lorry miles, or twice the total carbon dioxide produced by the entire container terminal over the same period.

“Hopefully, this learning about modal shift ability is an important part of the narrative that can be fed to decision-makers,” he says.

“We are merely making rail more attractive. It is up to the customer to make the choice. If there is a very urgent delivery that cannot cope with the rail timescale, then the customer will choose to go by road. If it is less time-sensitive, they can accept rail.

“Road is more flexible. If you book a road job for tomorrow, it can be done. If you try to book a rail slot for tomorrow, that is more problematic. It is more likely to be two or three business days slower.

“But look at the bigger picture. The customer perhaps placed an order 12 weeks ago for goods in China. Then shipped it ten weeks ago, and had an extra two weeks coming round the Cape instead of through Suez because of risk in the Red Sea. So probably there is enough time to schedule to use rail.

“We are asking customers to make plans earlier, so we don’t have to keep playing Tetris with the boxes in the port.”

Trenchard says more rail capacity will be needed, along with sufficient scale at inland railheads.

“For Southampton, there are not immediate bottlenecks. But with the growth ambitions for rail freight, that will change over time.

“For London Gateway, there is a capacity issue around London linking to the East and West Coast Main Lines. There are some blackspots where railheads are not available to us.”

DP World says the emerging use of electric road vehicles plays to rail’s advantage.

“Fifteen years ago, there was a huge fleet of truck drivers in diesel lorries. We called it ‘tramping’. They moved all round the UK, sleeping in the cabs for two weeks at a time.

“If you’re going to have decent jobs, with respect for drivers’ quality of life, being able to run a rail and lorry hub-and-spoke system is highly compatible. Drivers based in the Midlands can get home at night. That is consistent with electric lorries.

“So, there is a narrative for government about electric hubs with enough electrons for final-mile deliveries to run from railheads. It is important that we have this joined-up process with the road-rail interface.”

But there remains a significant challenge.

“Large companies are now starting to buy electric delivery vehicles in volume. These vehicles have a weight limitation - the extra weight of their batteries. Quite a large proportion of containers can’t go in these electric vehicles yet, because they are over 44 tonnes in total.”

Trenchard points out: “We are all only as strong as the weakest link in the supply chain.

“We’ve just had the first Green Methanol-powered Maersk ship call at Southampton. The cargo was discharged using an electric crane. We used our electric shuttle to move it to the railhead. It went on an HVO-fuelled train to the East Midlands Gateway, and the final mile delivery was done with an electric vehicle.

“So, containers have been delivered all the way with low-carbon technology. We can’t do it at scale, but it has now happened.

“It is quite an exciting time to be around here. Those who are willing to lean in can make a genuine difference.”

The full version of this article with expert feedback was published in Rail Review issue 2024 Q2 and in RAIL issue 1012. Subscribe to never miss an issue.