Railways, a Lesson in Market Failure

Railways, a Lesson in Market Failure
Benjamin Bucheger

Privatisation of British Rail refers to the period between 1994 and 1997 when the majority of the state owned and operated company British Railways was transferred into private hands. The Railways Act 1993, passed in British Parliament on November 5th, legislated the breaking up and selling off of the operations of the British Railways Board, the body which oversaw British Railways, with various regulatory functions transferred to the newly created office of the Rail Regulator. This came on the heels of the era of former US president Ronald Reagan and former UK Prime Minister Margaret Thatcher, the legislation being passed under her successor John Major, culminating from a general shift in political and public discourse towards privatisation and individualism. The idea behind privatization was that the privatized industry would bring about a reduced cost to the taxpayer, lower fares, improved customer service and more investment. These goals follow the idea of free market competition, that many firms competing in a large market drives down prices and increases efficiency. To put it another way, turn British Railways into a monopolistically competitive market where every firm provides basically the same service with small variations between them. As you can probably guess by the title, the vision turned out much different from the reality.

A quick note: For this article I will not be focusing on customer service as that is not an issue particular to economics (at least not the ones I’d like to highlight in this piece).

First let’s start with how the private rail system works in the UK. A fun fact: trains in the UK are not owned by the companies that operate the trains. Instead the trains are owned by Rolling Stock Operating Companies (ROSCOs) who lease the coaches, locomotives and freight wagons that run on the tracks to train operating companies (TOCs). The TOCs then apply for franchises from the Department of Transportation to run specific routes of track for a certain period of time. During this time the TOC operates the route exclusively. This type of track franchising was implemented to avoid the obvious problem of competing firms popping a train onto the same route unexpectedly causing heavy metal objects to crash into each other at upwards of 35 mph. The problem with this method, though, is that local competition is virtually impossible since only one TOC can operate a route at a time. What’s more is TOCs don’t actually have much choice in who to lease a train from. Certain trains can only run on certain tracks. Why would you lease a high speed train if you’re operating a small part of the network where those trains can’t get to full speed? If you own a high speed track why would you lease a slow train that will block the whole system? Big freight trains for a passenger line? Probably not. Some electric trains require a third rail, and others require overhead power lines. Specialized and limited infrastructure, along with limited space, becomes a problem really quick when many firms are trying to run on the network. What’s more is the freight load of government regulations that firms in the industry must follow to the letter in order to keep up safety and public health standards (cue crashing metal objects). What ends up happening is that TOCs are locked into providing a specific service in a specific area for a specific time with high regulations and complex leasing systems creating high barriers to entry and making local competition impossible. What’s been created is not a healthy monopolistically competitive market, but instead a series of local monopolies.

Now that that is established the question remains, does the private system lower taxpayer costs, fare prices, and increased investment, in which case this system change was successful? The answer to all three is no. Starting with taxpayer costs, according to a study done by the Centre for Research on Socio-Cultural Change published in June 2013, direct public expenditure on the rail has more than doubled since privatization and was running around £4 billion per year (around $5.089 billion) in 2013, increasing to around £6.4bn ($8.142bn) in 2018 according to a BBC report. This cost includes subsidies paid to the railroad and cost of enforcing regulations on dozens of individual private firms. Even with substantial government subsidies, fare prices continue to rise leading to situations in which commuters are being “priced off” the railway. According to another BBC report an average price increase in 2018 of 3.4% brought season tickets price up by about £100 ($127.22). A season pass from Liverpool to Manchester (around a 56 mile trip) costs commuters £3,152 ($4009.91). Prices increased again by an average of 3.1% at the dawn of January 2019. This comes despite many cancellations in November and December of 2017 and one in seven trains being delayed by at least 5 minutes in 2018, the networks worst performances since 2005. To add salt to the wound many British rail companies are at least partly owned by foreign state-owned companies, such as the TOC Merseyrail being partly owned by Nederlandse Spoorwegen, a state-owned company based in the Netherlands, meaning money is being taken out of the country with the sail of each ticket.

To continue, investments have not increased either. British train services are often slower and more overcrowded than predominantly publicly owned services in Germany, France, Italy and Spain due to delays and an inability to adapt to increased rail use that has persisted from the early 2000s. Because of this the rail industry has increasingly focused on supplying new infrastructure. Unfortunately in commercial terms these types of ventures are loss-making due to the nature of installing a train network and having to interface with other modes of transportation, predominantly roadways. Because of this such ventures would never be undertaken by the private sector, therefore the cost tends to fall on taxpayers. The Crossrail scheme, for example, which as of 2017 is 93% complete and estimated to cost £15.4 billion ($19.592bn), is being funded by a loan from the European Investment Bank, the European Union’s nonprofit long-term lending institution, rather than private investors.

In conclusion the privatisation of British Railways, despite its virtuous intentions, has turned out to be an economic disaster for both consumers and the British government underperforming at every level from the intended goals. With higher taxpayer costs, higher fare costs, slow downs left and right, and a lack of private initiative to invest the question becomes why did this happen? What is the fundamental flaw in the railway particularly that makes the private system in the UK so terrible? The problem is that a railway is inherently unprofitable. It is very expensive to operate and maintain the rails and when a TOC only operates a limited amount of track at any given time it is very hard to turn a profit without government subsidies. When British Railways was state-operated the state didn’t need to worry about this because they operated all of the track. When changes in regulations or maintenance where brought into effect the state could bring it about relatively quickly and cheaply compared to having to interface with potentially dozens of individual firms, a process that is slow making it more expensive to implement changes. It’s the same reason that the US doesn’t rely on private initiative alone to build and maintain the roadways. When it comes to massive transportation services, it just doesn’t work.

Works Cited

“British Rail.” Wikipedia, Wikimedia Foundation, 16 Dec. 2018, en.wikipedia.org/wiki/British_Rail

“Chris Grayling Blames Unions for Rail Fare Hike.” BBC News, BBC, 2 Jan. 2019, www.bbc.com/news/amp/uk-46731749

“Crossrail.” Wikipedia, Wikimedia Foundation, 7 Jan. 2019, en.wikipedia.org/wiki/Crossrail.
Hadley, Philip. “The Four Big Myths of UK Rail Privatisation.” Action For Rail, 1 June 2015, actionforrail.org/the-four-big-myths-of-uk-rail-privatisation/

“Merseyrail.” Wikipedia, Wikimedia Foundation, 2 Jan. 2019, en.wikipedia.org/wiki/Merseyrail

“Nederlandse Spoorwegen.” Wikipedia, Wikimedia Foundation, 9 Dec. 2018, en.wikipedia.org/wiki/Nederlandse_Spoorwegen

“Privatisation of British Rail.” Wikipedia, Wikimedia Foundation, 7 Jan. 2019, en.wikipedia.org/wiki/Privatisation_of_British_Rail

“Rail Fare Rises: Commuters 'Priced off' UK Trains, Union Says.” BBC News, BBC, 2 Jan. 2018, www.bbc.com/news/uk-42536159

“Rail Privatisation Is ‘Great Train Robbery’, Finds CRESC Report.” Manchester 1824, The University of Manchester, 7 June 2013, www.manchester.ac.uk/discover/news/rail-privatisation-is-great-train-robbery-finds-cresc-report/

Topham, Gwyn. “Train Fares: UK Rail Passengers Face Biggest Rise for Five Years.” The Guardian, Guardian News and Media, 5 Dec. 2017, www.theguardian.com/money/2017/dec/05/rail-fares-rise-ticket-prices.
Wellings, Richard. “Why Are Rail Subsidies so High?” Institute of Economic Affairs, 22 Jan. 2013, iea.org.uk/blog/why-are-rail-subsidies-so-high