Monday, 26 March 2007

The fallacy of renationalisation

Remove the franchise from First Great Western! Renationalise the railways! It’s the only way to provide a half decent service! How often have you heard such calls? And how tempted are you to believe that there is a degree of truth in them? If you are tempted then stop for a moment, think about what you are advocating and consider the following.

The first question to ask yourself is whether the railway system, as it exists today, is actually a proper private entity in any meaningful sense of the term. Who owns the railway? Not the train operators, that’s for sure. If they did then they wouldn’t have to bid for the right to run train services. In actuality, it’s the government which holds the title deeds to the railways: it says who can, and who cannot, run services; it tells them what services to run and, increasingly, how to run them. If the contractors don’t meet the government’s requirements then their agreement is terminated and their services dispensed with – as the case of GNER neatly testifies. That’s hardly a private system: it’s a publicly, state owned system partly contracted out, on a short term basis, to private companies.

So, if the system isn’t properly private in the first place calls to renationalise it seem somewhat futile. But there is also a more important issue at stake: the fact that most people believe the system is private leads them to arrive at sweeping and erroneous conclusions. These often take the form of blaming private train operating companies for most, if not all, of the railway's current ills. Yet…

…are cuts in services made by greedy private companies seeking to make a fast buck? No, they are actually driven by government actively reducing service specifications.

…are fare increases implemented by fat cats in boardrooms wanting to boost their profit figures? No, most fare increases are mandated by the government seeking to increase the amount of money coming from passengers.

…is the lack of new rolling stock and capacity due to corporations trying to save money by squeezing more and more passengers onto already overcrowded trains? No, it is caused by government-created franchise specifications which are restrictive and make no provision for rising passenger numbers.

See the pattern? At the bottom of most of the problems is the government, not private companies. Calling for yet more government involvement through ‘renationalisation’ is simply prescribing more of the same poison which is damaging the system in the first place. It will result in an even greater array of problems and a further deterioration in service quality.

Private companies don’t, of course, always get it right but they are, in general, far more efficient at running things than the government; and this is as true in rail as it is elsewhere. But in order for them to be effective they require a degree of operational freedom which just isn’t present on today’s rail network. However, while most people would, at least grudgingly, accept that private entities are efficient, the public is more sceptical about the profit motive of private firms. They think that profit can only be provided at the expense of a good service and that the mission of a private company is to ‘rip them off’. Nothing could be further from the truth.

There is nothing whatsoever wrong with making a profit. Indeed, it is profit that creates funds for future investment, for staff salary increases and for shareholders and investors. And neither is there anything wrong with providing a return for investors. The railways need capital; without it there can be no future development. And that capital will only come if rail companies are able to provide a good return for investors. No profit, no investors, no capital, no development, no new carriages, no new capacity, no new anything. And then we’re back to precisely the situation we had under British Rail where the railways were constantly starved of cash causing a backlog of investment which still haunts us to this day. Profit is an essential part of the functioning of a market economy and it works in everyone’s interests – rail passengers included.

It is also a mistaken belief to hold that private companies are only out to rip everyone off. Unlike the government’s power to tax, no private company, train operators included, is able to force consumers to deal with it. The only way for them to get money from people is by offering a positive: a service in return for payment. But train companies are a special case because they’re a monopoly provider, people will argue: they can subject us to horrendous conditions and extortionate charges and we still have to use them. But these conditions already exist on the rail network and they are caused, not by private business, but by government interventions. As such, it is a completely unconvincing argument to accuse private train operators of something they may do in theory when government involvement is already causing the very same problems in practice. In reality, while a truly private system may not be completely perfect, it would be more sensitive to consumers needs and would seek to grow its market share – and profits – by attracting non-rail users to the service: something it could only do by providing high service standards at reasonable prices; not by 'ripping people off'.

So, the state of today’s railway isn’t the fault of ‘privatisation’ at all and what the railways need today isn’t renationalisation. What the railways need today is privatisation proper.


Anonymous said...

All great idiological stuff, but how do you deal with the following unpleasant facts:

1, the railways are now costing the taxpayer 2 to 3 times as much per year (in real terms) than BR did.

2, Network Rail has hugh debts that BR never had. Sooner or later these will need to be paid off by either the taxpayer or the passenger. At the moment these debts are artifically depressing the true cost of the current system

3, Walk-on fares have increases by way above the rate of inflation and are now higher than it would have been politically accepable for BR to set.

4, Passenger numbers have increased, but not by the factor or 3 to 4 times which would be needed to justify the hugh extra cost placed on the taxpayer.

5, On some routes services have improved with new stock but on others it has deteriorated (Bath to London is now 10 minutes slower for example, coaches are being refurbished to cram more seats in, buffet cars are being abolished and the railway always seems to be shut on a Sunday)

6, Whilst there are some local variations, overall reliabilty levels are no different from those of BR

The rough and ready figures above would suggest that BR was at least TWICE as efficient as the current system in terms of service per taxpayer's pound. To my mind this suggests a very strong arguement for returning to BR which although it wasn't great and may not be the theoretical best would be TWICE AS GOOD as what we have now.

You suggest that "proper-privatisation" sould improve things and you might very well be right but what you are suggesting is untested. the BR model is tested and found to be TWICE AS GOOD. I known which model I would choose.

Anakin Skywalker said...

It is true that, overall, the railway today costs a great deal more than it did before ‘privatisation’. However, those cost increases come disproportionately from the elements of the system run by the state. Private Train Operating Companies are, by and large, extremely efficient and have reduced the costs of their operations. First Great Western is a case in point: ten years ago it received millions in subsidy; today, directly, it costs nothing for the taxpayer to run – indeed, it is a net contributor to government funds.

This current government is all too keen to throw money at things. The great lesson is that high levels of expenditure do not necessarily create good services. And this is as true in rail as it is elsewhere. There is no reason why, under a private system, that is correctly structured overall operating costs can come down. Private companies are much better at reducing costs and increasing efficient than government.

Network Rail’s debts do, of course, need to be accounted for. And, correctly, these should be included on the government’s balance sheet; that they currently aren’t is merely a reflection of the dishonesty of a government obsessed with appearance rather than reality. No private company is going to take on these debts without at least some compensation and if the system is to be properly privatised the taxpayer will have to fund at least some of this cost. As unfortunate and unsatisfactory as this is, it will, over the longer term, yield benefits as eventually taxpayer support will be greatly reduced.

The picture on fares is actually mixed. Some walk on fares have increased but pre-booked fares have been dramatically reduced: so much so that the cost of travelling for those prepared to be flexible and to book in advance is cheaper now than it was under British Rail. Walk on fares do not suit everyone, of course, but in a system where capacity is scarce and where the government wants hefty premium payments it is inevitable that yield management techniques will be put in place to regulate demand. Under a truly private system capacity may well be less of an issue as investment into the system would not be as restricted as it is now and, therefore, prices may well fall.

In essence, there is nothing in your comments that indicates privatisation of the system would fail. That said, I do not necessarily disagree that, overall, British Rail was more efficient than the current system: it’s just that the inefficient bits of the current system tend to be those parts that are state run. It is also the case that the structure of the current railway does very little to optimise efficiency; on the contrary, it actually encourages inefficiency. It is perfectly logical, therefore, to assume that proper privatisation would remedy these things and would lead to a better overall system both in terms of service delivery and financial status.

Finally, while British Rail was not as bad as many people make out it did have one very distinct disadvantage: it did not have access to a ready supply of capital to invest in necessary projects – even where such capital would have represented a prudent and high return investment. This meant the network was constantly starved of cash which created a massive backlog of investment – the impact of which is being felt today and is part of the reason as to why so much money has been, and still is being, spent. Renationalisation would simply reintroduce that same problem.