What to do with the railways

The government needs to loosen its regulatory stance on the railway industry and let the private sector take command of both infrastructure and services, which in turn will create investment, encourage innovation and ease pressure on the public purse.

Clapham Junction over crowdingIn the last few years there has been a growing debate over the state of the UK railway industry, politicians and passengers alike argue that it is in dire need of reform. Overcrowding on South East commuter lines and inter-city routes has become a major concern due to the lack of spare capacity, whilst the huge costs of running the network is shifted on to the taxpayer in the form of a £5.2 billion annual subsidy.

Advocates of the nanny state are quick to suggest that renationalising the industry is the silver bullet. However, in reality this is highly unlikely. Since 1993, when the then state-owned British Rail was privatised, the rail industry has benefited from a doubling of passenger numbers along with improvements in punctuality and safety. Doubtless the industry needs structural reform but of the kind that reduces state intervention rather than increases it.

To understand what needs to be done, we need to take a closer look at the structure of the industry itself. Currently it is split into two main parts: tracks, signalling and stations are handled by the government-backed Network Rail, whilst passenger and freight services are run by nineteen train operating companies (TOCs) as part of a franchise agreement.

This market structure creates unnecessary costs as Network Rail is the only company in charge of maintaining and operating infrastructure. In defending this framework, politicians argue that the rail industry is a classic example of a ‘natural monopoly’, thus having more than one firm managing the infrastructure would involve a wasteful duplication of resources. However, this isn’t strictly true as before WWII rail infrastructure was successfully managed by a number of separate companies on a purely commercial basis. As with any monopoly, the absence of competition with Network Rail means they have no incentive to maximise efficiency and keep costs to a minimum – a recent report recommended that £1 billion a year in cost savings could be achieved by 2020.

Market structure isn’t the only cause of dysfunction. The rail industry is subject to layers of red-tape by the Office of Rail Regulation (ORR), a quango, the most damaging of which is a cap on ticket price rises. The government’s rationale for price caps is that rail travel is a merit good; its consumption is beneficial to society due to the reduction in carbon emissions and lower congestion on the roads. Therefore many ministers believe setting limits on ticket price rises and subsidising the costs of running the network is an effective way of encouraging people to use trains.

This however has led to overcrowding on commuter and inter-city lines as demand for tickets has outstripped supply. Conversely, on regional routes the government has been forced to subsidise 60% of the running costs in order to keep ticket prices low. Bearing in mind that just 3% of passengers use these routes, this is a blatant misuse of taxpayer’s money.
To resolve some of these issues several actions should be undertaken. TOCs should be given responsibility for infrastructure maintenance and operation in addition to passenger and freight services. This would achieve two things: firstly, companies would be able to gain from vertical integration; having control of train stations and platforms as well as the actual service would increase efficiency and reduce transaction costs. Secondly, the maintenance of infrastructure, previously operated by the monopoly, Network Rail, would be subject to competitive tender. This would drive down the running costs of the network which will, in turn, trickle down to passengers in the form of lower fares.

Likewise, removing regulation on ticket prices would let the market mechanism function properly. Allowing fares to rise on commuter and inter-city lines would enable train companies to invest in greater capacity where demand is high, alleviating the problems of overcrowding. Letting the private sector choose where and when to invest is far more favourable to the current alternative of government officials wasting public funds on ‘white elephants’ such as HS2.

Moreover there should be a reduction in financial support for regional train lines. These lines, which currently consume 50% of the rail subsidy, are under-utilised and offer very little value for money to passengers and the taxpayer. Reducing the public subsidy for them could save a substantial £1.8 billion a year – at a time of austerity this is hardly a figure to scoff at.

Without a doubt these changes would eventually lead to a smaller and leaner rail industry operating much closer to its optimum size. More importantly however, it would allow the free market a greater degree of autonomy over the network which would start up the engines of efficiency and put it back on track to profitability.