TUC-commissioned report says rail selloff has brought little private investment in new technology but dearest fares in Europe

Privatised rail has meant higher fares, older trains and a greater bill for the taxpayer, with train companies diverting profits to shareholders with barely any investment, a report has found.

Researchers said the public was "bamboozled" by number-shuffling in the system and called for the abolition of train operating companies, concluding that the selloff of rail had brought little private sector investment in new technology and the most expensive fares in Europe.

The TUC-commissioned report, by the Centre for Research on Socio-Cultural Change at the University of Manchester, says private train companies depend heavily on public subsidy to run services. It claims that the halving of track access charges for companies since privatisation has resulted in a hidden, indirect subsidy from the taxpayer.

Researchers said the five largest private train companies received almost £3bn in taxpayer support between 2007 and 2011. This allowed them to make operating profits of £504m, over 90% of which was paid out in dividends to shareholders, the TUC said. In contrast, they argue that the east coast mainline, which is currently state-run, is reinvesting profits into the railway.

The report said the average age of trains had risen by two years since rail privatisation and carriage space had not increased to match the growth in passenger numbers. The majority of new rail investment had been financed by Network Rail via taxpayer funding or government-underwritten borrowing. Private sector investment in new technology, such as the Pendolino tilting trains, had been underwritten by the state.

The authors said the Treasury kept many of the costs of rail off the public balance sheet and created the "illusion of profitability", adding that operators, notably Virgin, had played on these confusions to claim unwarranted credit for improvements to rail services.

One of the authors, Professor Karel Williams, said the research showed that the rail franchising system allowed private firms to make easy profits from public subsidy. "It would make sense to abolish the train operating companies and it would cost the taxpayer nothing if it were done as the franchises expired," he said. "Train and track operation could then be integrated under a new not-for-profit company."

Frances O'Grady, the TUC's general secretary, said the study "explodes the myth that rail firms are bringing added value to our railways". She said: "Rail privatisation has not brought the improvements its cheerleaders promised – the average age of trains has increased and most new investment is funded by the state.

"The government must accept that the current model is broken. Its determination to impose franchising across the network – even on the east coast mainline which is performing well as a nationalised service – shows ministers are ignoring the evidence of 20 years of failure."

Train operating companies dispute the TUC's methodology in establishing the full direct and indirect public subsidy. A spokesman for the Association of Train Operating Companies (ATOC) said passengers would be the beneficiaries of a higher subsidy.

Michael Roberts, ATOC's chief executive, said: "Britain's railway has been transformed in the last 15 years thanks to the public and private sectors working successfully together to deliver for passengers and taxpayers.

"By introducing competition between train companies to run services, government has ensured operators have played a crucial role in reversing the fortunes of the railway by motivating them to attract more passengers.

"Significant investment plus an industry focused on encouraging rail travel are generating record levels of revenue to pay for more trains, faster services and better stations."

O'Grady said private train operators' claim to be responsible for more people using the railways should be "taken with a huge pinch of salt" as passenger growth mirrored changes in the wider economy. ATOC said passenger numbers had grown and passenger satisfaction was at a record high.

The shadow transport secretary, Maria Eagle, said: "Britain's railways are not delivering value for money for farepayers and taxpayers and need reform. It cannot be right that train companies were left with £305m last year, despite paying less to the government than they received in subsidies. As a first step, ministers must abandon the costly and unnecessary privatisation of rail services on the east coast."

Transport minister Norman Baker said: "The reality is that the privatised system is delivering in general terms a good outcome for passengers, with more people travelling now than at anytime since 1927 on a network half the size. It is absolutely true we should seek to get the best value for both the passenger and taxpayer, by implementing the McNulty review."

He said that while his party, the Liberal Democrats, would not have privatised rail in this way, "we are where we are. It may be superficially attractive to allow franchises to lapse but why would any company want to invest in that scenario? The passenger would suffer."

A Virgin spokesman said: "We've not done it single-handedly, but we have customer satisfaction that was unheard-of in British Rail days."