Britain’s rail policies defy economic logic

Britain could teach the world how not to run a railway. A combination of vast subsidies and overcrowded commuter trains means both taxpayers and passengers get a bad deal.

Privatisation should have delivered a dynamic free-market industry that improved services and cut costs. But the government wouldn’t give up control; it suffocated rail firms with regulation, choking off innovation. Worse still, an artificial structure was created that separated track from train, overturning almost two centuries of railway tradition and introducing layer upon layer of bureaucratic complexity.

Subsidies ballooned, more than doubling in real terms compared with the pre-privatisation era. Government support is now running at around £6 billion a year, meaning taxpayers now fund roughly 40 per cent of rail spending. Network Rail debt is forecast to hit £50 billion in 2020, a massive liability for future generations.

But the big winners from such largesse are not passengers. Armies of highly paid officials, lawyers and consultants have prospered as a result of the labyrinthine rules.

More positively, there has been a big rise in passenger traffic on the railways – and not just because anti-car policies have forced more travellers to use public transport. But with this growth in demand has come congestion.

Rush-hour commuter services into many major cities now suffer severe overcrowding. In the worst affected locations, the problem has gone beyond the problem of standing-room only. Passengers must often wait for the next train as they cannot physically fit into the carriages.

This is not how a market is supposed to operate. Businesses would normally take urgent steps to address such drastic declines in the quality of service. But the rail network is not a normal market, and train operators’ room for manoeuvre is severely limited.

The obvious solution to overcrowding is to vary fares in order to incentivise passengers to use less busy trains, thereby relieving the pressure in the peak hour. This is common practice in other sectors, such as airlines. However, on the most important commuter rail routes it is not permitted.

In the same way that Soviet apparatchiks determined the price of bread – creating shortages and long queues in the process – the government imposes price controls on the rail industry, and with similar results. In practice, someone travelling on a packed train at 8am typically pays the same as a passenger on a much quieter service at, say, 9am. Only later on, when off-peak tickets become available (usually at 9:30am) do prices drop.

This rigid regulated price structure has been disastrous. Not only has it produced sardine-like conditions for commuters; it has also created strong political pressure for the government to spend enormous sums increasing rail capacity to deal with the problem.

The amounts involved are astounding. The total cost of just two schemes in the South-East, Crossrail and Crossrail 2, is likely to reach £50 billion, enough to build roughly 1,000 miles of brand new six-lane motorway. In addition, overcrowding on the southern section of the West Coast Main Line has been used to justify the hugely expensive High Speed 2. As well as imposing a large burden on taxpayers, such London-focused, rail-centric spending is draining investment from better-value road schemes in the North of England.

Building new rail capacity is an expensive and complicated solution to a problem that in many cases could be solved relatively simply by allowing train operators more flexibility to smooth demand. It is far cheaper to make better use of existing infrastructure than to construct brand new lines.

The economic logic for deregulating fares is therefore compelling. Operators could then charge ‘super-peak’ prices on the very busiest services while offering cheaper tickets on quieter trains. This would not just benefit taxpayers by reducing the need for new infrastructure, it would also benefit many lower-paid workers such as cleaners and shop assistants, who often travel outside the peak hour but before current off-peak fares begin.

Flexible pricing could also encourage employers to alter their work patterns. For example, there are few good reasons why universities could not shift to a later schedule, allowing students and employees to benefit from lower travel costs.

Clearly, there would also be losers from deregulating fares. While many peak-hour commuters would rather pay more to avoid the crush, others might prefer overcrowded conditions to higher prices. The answer here is surely to offer more choice, for example by providing cut-price, standing-only carriages – effectively reintroducing third class.

A bigger obstacle to a change in policy is a far more powerful group of losers – the vested interests that profit from unnecessary public spending on new rail projects. Key beneficiaries include the bloated government agencies in charge of planning the schemes, and the firms winning the lucrative contracts to build the infrastructure and supply the trains.

Britain’s rail policies certainly defy economic logic, but they also allow various influential groups to make vast amounts of money at taxpayers’ expense. This means reform is unlikely.

YP February 2015

Unless otherwise indicated, all articles on this website are written in a personal capacity.

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Why taxpayers should be angry about rail policy

Taxpayers have far more reason to be angry about rail policy than passengers. They pay about £6 billion a year to support the railways, even though most of them rarely use trains. And it makes little economic or environmental sense to subsidise long-distance commuting, which encourages inefficient travel patterns and energy intensive lifestyles.

The argument for subsidies on grounds of fairness is also weak, as rail commuters are on average far richer than the general population. Measures that froze rail fares or limited increases to the Consumer Price Index would benefit this affluent minority at the expense of taxpayers and the wider economy.

Moreover, stricter price controls would exacerbate overcrowding problems, putting pressure on the government to fund hugely expensive infrastructure projects to increase capacity.

Regulating fares is therefore not a sensible way to cut travel costs. Instead the government should reverse current policy and give train operators more flexibility to vary fares to address congestion problems, for example by introducing ‘super-peak’ pricing and offering large discounts to passengers who avoid travelling at the very busiest times.

 

A shorter version of this letter was published in the London Evening Standard on 8 December 2014.