Renationalise the railways?

The West Coast franchising debacle has highlighted serious shortcomings in the structure of the railways – but it should not be used to justify renationalisation.

Indeed, the role of the Department for Transport in the scandal shows the railways were never properly privatised in the first place. Politicians and officials retain tight control over the industry, deciding service levels, fares and investment priorities.

Such interventions explain why privatisation hasn’t worked as well as initially hoped. While there have been successes – including a large increase in ridership and better safety – the level of taxpayer subsidies has risen to unacceptable levels (about £5 billion a year).

High subsidies reflect the complex, artificial structure imposed on the industry. Layers of bureaucracy mean costs are far higher than on comparable networks abroad.

Another factor is wasteful investment. Economic objectives have tended to be outweighed by politics and the desire to please powerful special-interest lobbies. The recent decision to electrify loss-making branch lines in Wales is a recent example of this tendency.

Renationalisation would only make these problems worse. It would inevitably lead to even more bureaucracy and political interference. The historical record bears this out. Nationalisation was tried before and outcomes were poor.

Rather than going back to the 1970s, the government should restructure the railways along genuinely private lines. The entrepreneurship and innovation of the private sector should be unleashed to deliver lower subsidies, cheaper fares and better customer service.

November 2012, Director


The government is off track with its uneconomic transport policy

Is electrifying branch lines in Wales a top priority for transport investment? It seems unlikely. But then again the government’s plans to invest £9.4bn in rail infrastructure show scant regard for economics. Cynical political calculation seems to be the driving force.

Regional interests have long complained that London receives a disproportionate share of transport spending. Now the provinces will get their pet projects: the north of England gains more services through the much-hyped Northern Hub; the East Midlands benefit from the electrification of the Midland Main Line; and so on.

But most of these schemes are difficult to justify from an economic perspective. In commercial terms they are loss-making and require substantial taxpayer support. Indeed, it seems likely that, as the number of train services increases, additional operating subsidies will be required. Taxpayers already pay around £5bn per year towards the railways.
The government has claimed that much of the cost will be recouped from higher passenger numbers and efficiency gains. This is doubtful. There are numerous examples of rail planners forecasting passenger growth that failed to materialise. And while efficiency gains are possible, they will be difficult to deliver given the complex artificial structure imposed on the industry.

Then there is the argument that rail improvements deliver wider regeneration benefits, boosting growth. This is also questionable. There is little evidence of economic resurgence in many of the provincial towns already enjoying fast rail links, such as Doncaster, Darlington or Wigan.

Worse still, new rail projects often become magnets for expensive taxpayer-funded regeneration schemes, promoted by local political elites. The government has spent billions along the route of High Speed 1, for example. Such regeneration efforts are counterproductive. If favoured areas improve, others tend to decline, due to the redistribution of taxpayers’ money.

The railways are a classic example of a politically distorted market. There is huge variation in the level of subsidy to different parts of the network. London commuter routes generally receive little funding from government, in marked contrast to rural provincial routes that are almost entirely dependent on handouts. This system means passengers on more profitable lines (including in and around London) may end up cross-subsidising those on loss-making ones. At the same time, those choosing to drive instead of travelling by train face very high rates of taxation through the imposition of both VAT and fuel duty – a clear instance of unfair competition.

Many of these distortions are deliberate. New Labour pursued policies to force people out of their cars and on to the trains. A combination of strict planning policies and regeneration subsidies was used to push economic activity into congested city centres and around public transport hubs. At the same time, measures were introduced that artificially raised the costs of commuting by car and road investment was slashed. As peak-time trains became more and more crowded, the pressure increased for investment in new capacity, even though demand had been artificially inflated by various government interventions.

In this context, the government should be extremely cautious about investing in rail. Rather than risking billions of pounds of taxpayers’ money, it should focus on creating a level playing field in transport so that investment can be based on genuine patterns of demand.

Phasing out taxpayer subsidies to uneconomic lines should be a key priority. Another important step would be to introduce more flexibility for train operators to tackle overcrowding without the need for expensive new track infrastructure, for example by providing more frequent services and extra rolling stock. Further action is also needed on planning controls. Businesses should be free to operate in uncongested, out-of-town locations, even if this means fewer people using public transport.

A radically different policy on investment is needed. Ideally it should be left to the private sector, which would only undertake rail schemes that were commercially viable. However, in the absence of a larger role for private investors, the government should take a far more rigorous economic approach to new infrastructure.

17 July 2012, City AM

We should not renationalise the railways

Privatisation is often blamed for the shortcomings of Britain’s railways. This is unfair. Genuine privatisation never happened. Nominal ownership may have been transferred to the private sector, but the government remains firmly in control.

Renationalisation would only exacerbate this problem. Politicians and bureaucrats would still make the key decisions on rail – such as today’s announcement that £9.4 billion is to be invested in various loss-making projects. But there would be even less attention given to commercial considerations and even fewer opportunities for entrepreneurship and innovation in the industry.

A far better option would be to move towards proper privatisation. Taxpayer subsidies could be phased out; loss-making lines could be closed; and investment could be restricted to those projects that were profitable. And perhaps most importantly, full privatisation would allow the merger of track and train, ending the disastrous fragmentation of the railways.

Fragmentation is not a market outcome – politicians and officials imposed an artificial structure on the industry. Historically, railways have nearly always been vertically integrated. But the government, influenced by EU policies on open access, has largely ignored this lesson. Different firms now manage the infrastructure, run the trains and own the rolling stock. There is also a complex system of regulatory oversight. This complexity has contributed to an explosion of costs. Following privatisation, subsidies from taxpayers have tripled to about £5 billion a year.

A complex structure is not the only problem facing the sector. The government also makes it extremely difficult for private companies to deliver efficiency gains. It actually became harder to close loss-making lines after privatisation, while service levels are largely determined politically, through the franchising system, rather than on commercial grounds.

The government also maintains price controls, including on key London commuter routes. Private firms are therefore severely limited in their ability to tackle congestion through more flexible fare levels. But they still get blamed for the resulting overcrowding. Worse still, the congestion creates pressure for investment in new capacity – placing a still greater burden on taxpayers.

While private involvement has brought some improvements, for example to marketing, the scope for entrepreneurship remains extremely limited. Indeed, when firms have tried to develop new privately-funded rail infrastructure, they have faced obstacle after obstacle from transport bureaucracies unwilling to cede control.

Rail investment is currently determined in a process not too dissimilar to Soviet central planning, and directed largely to meet political objectives rather than economic ones. As we see today, huge sums are spent on loss-making projects that make no commercial sense, with costs loaded on to taxpayers.

Perhaps the fundamental problem is the strength of the rail lobby, bolstered in some areas by the disproportionate political influence of wealthy rail commuters. Concentrated special interests have been able to extract huge amounts from taxpayers by capturing policy. Renationalisation is unlikely to break the cosy relationship between the rail lobby and policymakers; it will simply lead to more of the same.

16 July 2012, Huffington Post UK