End the strikes by privatising the Tube
25 January 2016
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Regulation
21 January 2016
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Economic Theory
11 November 2024
Recently, Ian King, in The Times, highlighted the lunacy of Transport for London’s statement about profits from London Underground: “We don’t make a profit because we reinvest all our income to run and improve your services.”
To begin with, this is a nonsensical statement that would probably be challenged by the authorities if it were made by a private company. If a company reinvests its income, it still makes a profit. A company that has net income after interest and taxes of £300m and invests it in (say) new trains has made a profit of £300m and those new trains go on the balance sheet as assets. Indeed, privatised energy companies were heavily criticised about three years ago for reinvesting all their profits in new plant thus avoiding corporation tax because of the investment allowances they received.
But, let us assume that it is really true that London Underground does not make a profit and is proud of that. Should they be? Certainly not. Ian King made some very good points in his article; I will elaborate and make some further points.
Firstly, a profit is an indicator that the factors of production are being used efficiently to provide something of value to customers. Of course, London Underground is a monopoly and profits could be a sign of the exploitation of its monopoly position, but making no profits is nothing to be proud of – it is an indication that the organisation is wasting the precious resources vested in it by London’s taxpayers. In fact, Catholic social teaching has put this rather well. Whilst criticising unjust exploitation, one of John Paul II’s most important encyclical letters states: “The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied” (emphasis in original).
Indeed, you could argue that, even if the owners of a business wanted to give all its profits away, a business might still wish to make a profit because the profit sends information about whether the business is doing something socially useful.
Let’s put aside the semantic issue of whether London Underground does or does not make profits as properly defined. There are two other peculiarities of a business reinvesting all its revenues. Firstly, it suggests that amount of money the business invests will depend on past profits. Why should that be? Whether London Underground replace all the carriages on the Bakerloo line or add some more escalators or platform space should depend on the future returns from those investments, and not on the cash that happens to be flowing into the business from the profits it is making now.
Secondly, who exactly is taking the risks? That part of future investment not financed by recycling profits will, no doubt, be financed by some form of borrowing or taxes levied on Londoners. There are all sorts of ways in which this might happen and the borrowing might be kept off the balance sheet, but the capital must be raised from somewhere. If those investments don’t pay off, it is the taxpayers of London who suffer. They will pay higher taxes to service the debt or subsidise the investments. In a sense, London Underground is thumbing its nose at the taxpayers. If investments pay off the money gets reinvested in the business and Londoners never see a return. If investments do not pay off, the Underground will need subsidies. In other words, there is no equity cushion and just a one-way bet against London’s taxpayers.
This is all symptomatic of entirely the wrong approach to policy in relation to the tube. The Labour government tried to privatise the infrastructure whilst keeping the trains government run. As an article published by the Institute of Economic Affairs suggested a few years ago, this is the wrong way round. Either the network could be privatised as separate lines with some competition between them, or the tracks could remain in government hands and the services contracted-out (to at least three contractors).
The contractors should be free to innovate. They could decide whether their workers were contractually prevented from striking (this should not be a matter of government regulation); they could move to driverless trains if they wished; and so on. Because there would be competition, the strike threat would be nullified. Yes, one line might shut down as a result of strikes but others are more likely to stay open (if they kept drivers at all).
Not all contracting-out works. Sometimes what economists call “transactions costs” are too big. However, it seems to me that the upside from privatising the train services in the current situation could be huge. It could break the trade union domination and drive the innovation in service provision that is desperately needed.
Prof Philip Booth is the IEA’s Academic and Research Director, and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. This article was first published on Conservative Home.
To begin with, this is a nonsensical statement that would probably be challenged by the authorities if it were made by a private company. If a company reinvests its income, it still makes a profit. A company that has net income after interest and taxes of £300m and invests it in (say) new trains has made a profit of £300m and those new trains go on the balance sheet as assets. Indeed, privatised energy companies were heavily criticised about three years ago for reinvesting all their profits in new plant thus avoiding corporation tax because of the investment allowances they received.
But, let us assume that it is really true that London Underground does not make a profit and is proud of that. Should they be? Certainly not. Ian King made some very good points in his article; I will elaborate and make some further points.
Firstly, a profit is an indicator that the factors of production are being used efficiently to provide something of value to customers. Of course, London Underground is a monopoly and profits could be a sign of the exploitation of its monopoly position, but making no profits is nothing to be proud of – it is an indication that the organisation is wasting the precious resources vested in it by London’s taxpayers. In fact, Catholic social teaching has put this rather well. Whilst criticising unjust exploitation, one of John Paul II’s most important encyclical letters states: “The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied” (emphasis in original).
Indeed, you could argue that, even if the owners of a business wanted to give all its profits away, a business might still wish to make a profit because the profit sends information about whether the business is doing something socially useful.
Let’s put aside the semantic issue of whether London Underground does or does not make profits as properly defined. There are two other peculiarities of a business reinvesting all its revenues. Firstly, it suggests that amount of money the business invests will depend on past profits. Why should that be? Whether London Underground replace all the carriages on the Bakerloo line or add some more escalators or platform space should depend on the future returns from those investments, and not on the cash that happens to be flowing into the business from the profits it is making now.
Secondly, who exactly is taking the risks? That part of future investment not financed by recycling profits will, no doubt, be financed by some form of borrowing or taxes levied on Londoners. There are all sorts of ways in which this might happen and the borrowing might be kept off the balance sheet, but the capital must be raised from somewhere. If those investments don’t pay off, it is the taxpayers of London who suffer. They will pay higher taxes to service the debt or subsidise the investments. In a sense, London Underground is thumbing its nose at the taxpayers. If investments pay off the money gets reinvested in the business and Londoners never see a return. If investments do not pay off, the Underground will need subsidies. In other words, there is no equity cushion and just a one-way bet against London’s taxpayers.
This is all symptomatic of entirely the wrong approach to policy in relation to the tube. The Labour government tried to privatise the infrastructure whilst keeping the trains government run. As an article published by the Institute of Economic Affairs suggested a few years ago, this is the wrong way round. Either the network could be privatised as separate lines with some competition between them, or the tracks could remain in government hands and the services contracted-out (to at least three contractors).
The contractors should be free to innovate. They could decide whether their workers were contractually prevented from striking (this should not be a matter of government regulation); they could move to driverless trains if they wished; and so on. Because there would be competition, the strike threat would be nullified. Yes, one line might shut down as a result of strikes but others are more likely to stay open (if they kept drivers at all).
Not all contracting-out works. Sometimes what economists call “transactions costs” are too big. However, it seems to me that the upside from privatising the train services in the current situation could be huge. It could break the trade union domination and drive the innovation in service provision that is desperately needed.
Prof Philip Booth is the IEA’s Academic and Research Director, and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. This article was first published on Conservative Home.
3 thoughts on “End the strikes by privatising the Tube”
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> They could decide whether their workers were contractually prevented from striking (this should not be a matter of government regulation);
If governments wanted to make strikes illegal this would affect TfL just as much as any private company.
> Because there would be competition, the strike threat would be nullified.
This doesn’t appear to be working on the trains, which infrequently strik
> Either the network could be privatised as separate lines with some competition between them
There’s no room for competition. I can’t choose to get the Central line if the Northern line is on strike. This argument is ludicrous.
> Whether London Underground replace all the carriages on the Bakerloo line or add some more escalators or platform space should depend on the future returns from those investments
Which is why these capital investments are funded by grants based on future expected usage. Have you even researched this at all. Reinvesting is talking about OPEX not CAPEX.
> If a company reinvests its income, it still makes a profit.
Profit divested as a dividend is not reinvested. So this isn’t true for any private company.
> Secondly, who exactly is taking the risks? That part of future investment not financed by recycling profits will, no doubt, be financed by some form of borrowing or taxes levied on Londoners.
You could have researched this if you could have been bothered. There’s a variety of schemes.
Please go back to topics you actually understand, rather than arguing that reintroducing franchising (which is clearly broken – see Southern railway lines) is a good idea.
i am not sure why you think southern rail illustrates your argument. Firstly, I travel on it every day and the vast majority of the delays are the fault of the nationalised infrastructure provider. Secondly, it is a very good example of where the government merged franchises thus removing the competition, the opposite of what I suggest! Regarding the issue of competition between lines, this would be considerable. The northern line may not be a good substitute for the central line but the circle line (within its boundaries) certain is. You can reach very close to any destination by travelling to a station using a different set of lines. Many other lines (or combinations of lines) are pretty good substitutes for alternatives. I would be surprised if as many of 75% of stations in central London were not either at line junctions or within 0.25-0.5 miles of a station on another line
> The northern line may not be a good substitute for the central line but the circle line (within its boundaries) certain is.
By the same argument the buses are adequate competition for the tube thus the tube strike is not a big deal because people have plenty of options. I think many Londoners would disagree here.
And the 0.5 miles might do for Zone 2, but like yourself I don’t commute from Zone 2, nor do I think the majority who commute in. From anywhere outside about zone 3, the distance to the nearest other line is typically a mile or more.
In any case, even a partial strike would completely paralyse a network that’s running at capacity anyway,
> where the government merged franchises thus removing the competition,
If the infrastructure is the limiting factor, with no possibility to build new routes, competition is artificial at best in any case.
Southern Rail is a great argument for less privatisation, because fares rise substantially yet the service shows no real signs of improvement. At best the government is incompetent at franchising out services. If we take this view we should not encourage it to do more.
Its worth pointing out that there are examples of London Transport operating privately. LOROL which runs the Overground is private. MTR which runs TfL Rail & will run Crossrail is private. The Waterloo & City line is privately contracted out.
For the record, the W&C line does strike. Partial automation is in place and strikes still cripple it periodically. Even the most automated systems don’t take humans out the loop completely, so strikes will remain a factor.
So the question is asked, why is the Underground not private. The answer is found not by speculating about profit but by a quick check of the history books. TfL was forced to buy out the infrastructure companies running the Underground when they went bankrupt. Bailing out failing businesses and then re-franchising when it appears to work is a terrible solution, because, as we have seen with the banks, it eliminates moral hazard by removing risk.
It’s worth noting that the only mainline rail network that returned a profit and provided good customer satisfaction in recent years is the East coast mainline. In it’s wisdom, the government has decided a functioning railway is clearly a terrible idea so has privatised it again.
It’s also notable that the thought of TfL taking more control of the southern urban rail network was praised both across the political spectrum and widely by the general public. In this environment its hard to see why abandoning the Underground is a sensible idea on any level.
I have to say this is by far least sensible idea I’ve seen and the responses you’ve given only serve to illuminate the depths of your lack of research on the topic. Which is a shame because there are many good resources out there, from the detailed articles at City Metric, the news-style work of Londonist and the indepth analysis of London Reconnections.