Rail privatisation hasn’t worked. It’s time to reverse it

The good old days. Image: Getty.

Just who exactly supports the UK’s privatised railway industry? It’s certainly not passengers, taxpayers, railway employees or increasingly many politicians.

The state-owned British Rail was privatised over several years starting in 1995. Prime Minister Margaret Thatcher was politically astute enough to avoid privatising this industry. But her successor, John Major, had no such doubts – he was convinced privatisation would ensure “greater responsiveness to the customer, and a higher quality of service and better value for money”.

He couldn’t have been more wrong. It’s now time to call a halt on this misconceived and misguided experiment – it just isn’t working. It’s time to renationalise the whole industry.

The benefits of privatisation forecast by politicians never materialised. Fares are now much higher, infrastructure failures and train delays increasing, the train franchising system is floundering and passenger dissatisfaction is high.

British Rail, the former nationalised industry, was a fully vertically integrated industry. This meant that BR owned and was responsible for virtually every aspect of the railway business. One researcher found it to be “perhaps the most financially successful railway in Europe”. Government subsidy was only 15 per cent of revenue in 1994, making British Rail the least subsidised railway system in Europe at the time.

Privatisation saw the industry broken up into over 100 separate companies. This fragmentation has led to a complex contractual web of operational transactions between different industry players – with a profit mark up being extracted at every stage. Renationalisating the railways would put an end to the operational and structural absurdity of the industry – and be substantially less costly.

Dysfunctional franchise model

Passenger train operating companies are awarded on a franchised basis. Normally, the operators bid to pay the highest premium to the government to win the right to operate train services on specified routes. This is based on the revenue each bidding company considers they can extract from passengers after paying their premium.

Renationalisation would lead to abolition of the costly and dysfunctional method of awarding these franchises. It would abolish the convoluted gaming by operating companies, who frequently overbid on the most optimistic assumptions in order to win a franchise.

Take the example of the failing East Coast franchise. GNER and National Express have both already walked away from their East Coast commitments and Virgin East Coast is currently renegotiating its franchise. They can do this because the penalties for failing to deliver are too low.

What’s more, the whole costly and time-consuming refranchising process is repeated every seven or eight years. Renationalisation would bring a swift halt to this disruptive and costly process – and permit better long-term planning.

Fares through the roof

Certainly, the passenger hasn’t benefited by lower fares since privatisation. Only about 36 per cent of fare revenue is regulated by the government and, even then, fare increases are related to the higher retail price index (RPI) measure of inflation (and not the lower consumer price index). For unregulated fares, the train operators have not been slow to increase fare revenue well in excess of RPI. For example, across all operators, standard class unregulated fares have increased by nearly 30 per cent in real terms since privatisation.

Whenever the train operators have the freedom to raise fares they rarely fail to increase them to whatever the market can bear. The Trades Union Congress recently highlighted that British commuters are now “spending up to five times as much of their salary on season tickets” than their continental counterparts. A commuter season ticket in the UK costing £381 a month will cost the equivalent of £66 in France or £118 in Germany.

Neglected and costly infrastructure

Another key aspect of the privatised industry is the infrastructure company that owns the railway tracks, stations and signalling. The first infrastructure company, Railtrack plc, was a publicly listed company that had a short life. Within less than five years of floatation the came the fatal Hatfield rail crash, when an express train came off the track. An inquiry found that the disaster was directly related to Railtrack’s neglect of the infrastructure.

Railtrack’s successor, Network Rail, ultimately became a public sector body of the Department for Transport. But Network Rail has been hampered by Railtrack’s former neglect of its assets and higher costs resulting from the fragmented nature of the industry. Indeed, these issues meant that the McNulty report in 2011, commissioned by the then transport secretary, found the privatised rail industry had a high cost base and the costs per passenger-km would have to be reduced by 40 per cent to match railways in France, Netherlands, Sweden and Switzerland.


Misguided support

Even the taxpayer would benefit from renationalisation. Under privatisation, state subsidies have nearly doubled in real terms. Direct government support has also previously been given to private sector train operators if their revenues fall below expectations. More recent franchisees can now receive these corporate state welfare “top-up” payments where, for example, there is fall in GDP or a slowdown in the London jobs market. Conventional private sector companies carry these business risks themselves – not so for the train companies. Renationalisation could reduce subsidies and have major financial gains for the tax payer.

Industry players frequently justify the success of privatisation by pointing to the growth in passenger traffic (passenger journeys have grown from 800m in 1996-97 to 1,729m in 2016-17). But this growth is despite privatisation; not because of it. Economic studies suggest this is down to other factors, such as employment levels, growth in GDP, property prices, leisure travel and road congestion – but not to privatisation.

The ConversationOverall, railway privatisation has failed to achieve its original objectives. Fares and state subsidies remain high, passengers are failing to obtain better value for money and industry unit costs remain stubbornly high. No other country has fully adopted the UK model of railway privatisation. And for good reason – it hasn’t worked.

John Stittle, Senior Lecturer in Accounting, University of Essex.

This article was originally published on The Conversation. Read the original article.

 
 
 
 

“Stop worrying about hairdressers”: The UK government has misdiagnosed its productivity problem

We’re going as fast as we can, here. Image: Getty.

Gonna level with you here, I have mixed feelings about this one. On the one hand, I’m a huge fan of schadenfreude, so learning that it the government has messed up in a previously unsuspected way gives me this sort of warm glow inside. On the other hand, the way it’s been screwing up is probably making the country poorer, and exacerbating the north south divide. So, mixed reviews really.

Here’s the story. This week the Centre for Cities (CfC) published a major report on Britain’s productivity problem. For the last 200 years, ever since the industrial revolution, this country has got steadily richer. Since the financial crash, though, that seems to have stopped.

The standard narrative on this has it that the problem lies in the ‘long tail’ of unproductive businesses – that is, those that produce less value per hour. Get those guys humming, the thinking goes, and the productivity problem is sorted.

But the CfC’s new report says that this is exactly wrong. The wrong tail: Why Britain’s ‘long tail’ is not the cause of its productivity problems (excellent pun, there) delves into the data on productivity in different types of businesses and different cities, to demonstrate two big points.

The first is that the long tail is the wrong place to look for productivity gains. Many low productivity businesses are low productivity for a reason:

The ability of manufacturing to automate certain processes, or the development of ever more sophisticated computer software in information and communications have greatly increased the output that a worker produces in these industries. But while a fitness instructor may use a smartphone today in place of a ghetto blaster in 1990, he or she can still only instruct one class at a time. And a waiter or waitress can only serve so many tables. Of course, improvements such as the introduction of handheld electronic devices allow orders to be sent to the kitchen more efficiently, will bring benefits, but this improvements won’t radically increase the output of the waiter.

I’d add to that: there is only so fast that people want to eat. There’s a physical limit on the number of diners any restaurant can actually feed.

At any rate, the result of this is that it’s stupid to expect local service businesses to make step changes in productivity. If we actually want to improve productivity we should focus on those which are exporting services to a bigger market.  There are fewer of these, but the potential gains are much bigger. Here’s a chart:

The y-axis reflects number of businesses at different productivities, shown on the x-axis. So bigger numbers on the left are bad; bigger numbers on the right are good. 

The question of which exporting businesses are struggling to expand productivity is what leads to the report’s second insight:

Specifically it is the underperformance of exporting businesses in cities outside of the Greater South East that causes not only divergences across the country in wages and standards of living, but also hampers national productivity. These cities in particular should be of greatest concern to policy makers attempting to improve UK productivity overall.

In other words, it turned out, again, to the north-south divide that did it. I’m shocked. Are you shocked? This is my shocked face.

The best way to demonstrate this shocking insight is with some more graphs. This first one shows the distribution of productivity in local services business in four different types of place: cities in the south east (GSE) in light green, cities in the rest of the country (RoGB) in dark green, non-urban areas in the south east in purple, non-urban areas everywhere else in turquoise.

The four lines are fairly consistent. The light green, representing south eastern cities has a lower peak on the left, meaning slightly fewer low productivity businesses, but is slightly higher on the right, meaning slightly more high productivity businesses. In other words, local services businesses in the south eastern cities are more productive than those elsewhere – but the gap is pretty narrow. 

Now check out the same graph for exporting businesses:

The differences are much more pronounced. Areas outside those south eastern cities have many more lower productivity businesses (the peaks on the left) and significantly fewer high productivity ones (the lower numbers on the right).

In fact, outside the south east, cities are actually less productive than non-urban areas. This is really not what you’d expect to see, and no a good sign for the health of the economy:

The report also uses a few specific examples to illustrate this point. Compare Reading, one of Britain’s richest medium sized cities, with Hull, one of its poorest:

Or, looking to bigger cities, here’s Bristol and Sheffield:

In both cases, the poorer northern cities are clearly lacking in high-value exporting businesses. This is a problem because these don’t just provide well-paying jobs now: they’re also the ones that have the potential to make productivity gains that can lead to even better jobs. The report concludes:

This is a major cause for concern for the national economy – the underperformance of these cities goes a long way to explain both why the rest of Britain lags behind the Greater South East and why it performs poorly on a

European level. To illustrate the impact, if all cities were as productive as those in the Greater South East, the British economy would be 15 per cent more productive and £225bn larger. This is equivalent to Britain being home to four extra city economies the size of Birmingham.

In other words, the lesson here is: stop worrying about the productivity of hairdressers. Start worrying about the productivity of Hull.


You can read the Centre for Cities’ full report here.

Jonn Elledge is the editor of CityMetric. He is on Twitter as @jonnelledge and on Facebook as JonnElledgeWrites

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