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Granting growth: How government grants will continue to play an essential role in delivery of freight growth

Granting growth: How government grants will continue to play an essential role in delivery of freight growth

Rail Partners - Granting growth: How government grants will continue to play an essential role in delivery of freight growth
02 February 2024
Liam Bogues, freight and regulation policy lead

Last month, the UK government announced a long term target to grow rail freight 75% by 2050 which was rightly seen as a major step forward for the sector. We saw in Scotland during Network Rail's Control Period 6 (CP6) how influential the introduction of a target can be in creating a ‘can do’ approach to rail freight. This GB-wide target will focus minds on the need to transport goods in greener ways and will help to promote investment. 

A floor not a ceiling

The government's target is a good start, although Rail Partners and its members consider a more ambitious level of growth to be achievable and indeed necessary in the long term to support the government’s strategic objectives, including net zero.

Customers are increasingly turning to rail freight as they look to decarbonise their supply chains. In Freight Expectations Rail Partners demonstrated the demand is there to grow freight – with a trebling of rail freight by 2050 achievable under the right conditions. Reaching this target would mean the removal of 20 million heavy goods vehicles (HGV) movements and generate at least £5.2bn in economic benefits to the UK each year.

That is why, we believe that the government’s 75% target should be a marker on a steeper growth trajectory , rather than a growth ceiling.

About 80% of the government’s target can be achieved simply by rail freight retaining its modal share under the reasonable assumption that volumes across the sector increase in line with economic growth. Any additional growth required to achieve and exceed the government’s target will involve moving freight from other more carbon intensive freight modes, on to rail.

Driving modal shift

To drive this modal shift within a highly competitive freight and logistics sector, it is essential that rail freight services are affordable for prospective customers. Freight operators are therefore strongly incentivised to improve their offer, whether through operational improvements – such as running longer trains (which can now remove up to 129 HGVs from the roads with a single train) and reducing journey times by operating more direct services – or through investments in new assets and infrastructure.

Since the rail freight sector was privatised in the mid-1990s, freight operators have invested upwards of £3bn to improve the productivity, performance, and reliability of freight services. Despite these investments, there are a number of current challenges affecting the economics of road and rail and driving their costs apart.

Cost of doing business

The energy costs associated with transporting freight by rail have risen significantly in recent years due to increased charges for using electric traction. On top of this, rail network access charges paid by freight operators have increased and will rise by 18% over the next five years. Port charges are higher too,   as a result of the global economic downturn, due to a fall in the overall volume of goods coming in to quay sides.

By contrast, road fuel duty has remained unchanged for over ten years and in the last two budgets has been temporarily cut, and a surplus in HGV drivers has enabled the road haulage industry to bear down on price.

In order to address this cost gap, there is a continued need for incentives to drive modal shift and realise the significant benefits associated with the movement of freight by rail rather than road. The Department for Transport held a call for evidence on mode shift grants in the freight sector which presents an opportunity to consider how to strengthen the ties between government grants and national policy objectives including the new freight growth target and decarbonisation.

Grants for growth

There are currently two grants available in the freight sector to drive modal shift – the Mode Shift Revenue Support (MSRS) scheme and Freight Facilities Grant (FFG).

Mode Shift Revenue Support

MSRS helps address the cost differential between moving freight by road and rail. The initiative plays an instrumental role in the freight and logistics sector with DfT estimating that it removes 900,000 HGV movements each year, reducing carbon emissions and helping to decongest the road network.

The average successful MSRS application provides a benefit-cost ratio of over 6:1, reflecting that scheme is a highly effective government grant providing great value for money to the taxpayer relative to its current £20m annual budget. The scheme works particularly well within the intermodal sector where there is a high level of substitutability between road and rail, with some bulk schemes also receiving grant funding.

In light of the significant benefits unlocked by MSRS, Rail Partners has been calling for the grant’s budget to be doubled when the scheme comes up for renewal in April 2025. We have reiterated this call in our submission to DfT, but have also suggested some incremental changes that could improve the flexibility and simplicity of the scheme. These include recalibrating grant rates more regularly, so that they remain in line with the economics of road and rail, avoiding the under or overpayment of funding. The submission also proposes that fixed grant rates are introduced, meaning that operators apply for the same level of funding on a specific flow, which supports further competition within the rail freight sector while also providing greater clarity to freight customers on price.

Freight Facilities Grant

Separately, there is FFG which exists in Scotland and Wales but not currently in England. The scheme helps to address the often high capital costs associated with the development of new, or modernised, rail connected facilities and is contingent on a specified level of modal shift from road. In recent years, the scheme has part funded freight handling facilities in Scotland for Highland Spring and Tarmac.

A significant constraint of the current scheme is that only the benefits accruing in either Scotland or Wales can be considered when awarding funding, but rail freight operates across Great Britain. Rail Partners has therefore called for the scheme to become GB-wide, building on the benefits delivered in Scotland. This would also support further modal shift in the bulk sector, where the prohibitive cost of new facilities is often cited as a barrier to future growth – particularly in the construction market which is forecast to grow significantly.

Not just government

In recent months we have also seen the introduction of the DP World modal shift programme, a private sector-led initiative which incentivises the onward movement by rail of containers arriving at the Port of Southampton. Naturally, this initiative has been welcomed by the rail freight sector, and early indications suggest that it is successfully shifting freight from road to rail.

While mode shift to rail is evidently good for freight businesses, it remains true that most of the benefits associated with it accrue to non-users through reduced carbon emissions, decongestion, and safety benefits and so there will continue to be an important role for government grants to correct market externalities.

 Rail Partners looks forward to working with DfT and devolved transport authorities to ensure that future incentive mechanisms and wider rail policies are consistent with the delivery of the target for growth freight growth.

The mode shift grants call for evidence closes on 2 February. The full Rail Partners response can be accessed here.

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