The government is off track with its uneconomic transport policy

Is electrifying branch lines in Wales a top priority for transport investment? It seems unlikely. But then again the government’s plans to invest £9.4bn in rail infrastructure show scant regard for economics. Cynical political calculation seems to be the driving force.

Regional interests have long complained that London receives a disproportionate share of transport spending. Now the provinces will get their pet projects: the north of England gains more services through the much-hyped Northern Hub; the East Midlands benefit from the electrification of the Midland Main Line; and so on.

But most of these schemes are difficult to justify from an economic perspective. In commercial terms they are loss-making and require substantial taxpayer support. Indeed, it seems likely that, as the number of train services increases, additional operating subsidies will be required. Taxpayers already pay around £5bn per year towards the railways.

The government has claimed that much of the cost will be recouped from higher passenger numbers and efficiency gains. This is doubtful. There are numerous examples of rail planners forecasting passenger growth that failed to materialise. And while efficiency gains are possible, they will be difficult to deliver given the complex artificial structure imposed on the industry.

Then there is the argument that rail improvements deliver wider regeneration benefits, boosting growth. This is also questionable. There is little evidence of economic resurgence in many of the provincial towns already enjoying fast rail links, such as Doncaster, Darlington or Wigan.

Worse still, new rail projects often become magnets for expensive taxpayer-funded regeneration schemes, promoted by local political elites. The government has spent billions along the route of High Speed 1, for example. Such regeneration efforts are counterproductive. If favoured areas improve, others tend to decline, due to the redistribution of taxpayers’ money.

The railways are a classic example of a politically distorted market. There is huge variation in the level of subsidy to different parts of the network. London commuter routes generally receive little funding from government, in marked contrast to rural provincial routes that are almost entirely dependent on handouts. This system means passengers on more profitable lines (including in and around London) may end up cross-subsidising those on loss-making ones. At the same time, those choosing to drive instead of travelling by train face very high rates of taxation through the imposition of both VAT and fuel duty – a clear instance of unfair competition.

Many of these distortions are deliberate. New Labour pursued policies to force people out of their cars and on to the trains. A combination of strict planning policies and regeneration subsidies was used to push economic activity into congested city centres and around public transport hubs. At the same time, measures were introduced that artificially raised the costs of commuting by car and road investment was slashed. As peak-time trains became more and more crowded, the pressure increased for investment in new capacity, even though demand had been artificially inflated by various government interventions.

In this context, the government should be extremely cautious about investing in rail. Rather than risking billions of pounds of taxpayers’ money, it should focus on creating a level playing field in transport so that investment can be based on genuine patterns of demand.

Phasing out taxpayer subsidies to uneconomic lines should be a key priority. Another important step would be to introduce more flexibility for train operators to tackle overcrowding without the need for expensive new track infrastructure, for example by providing more frequent services and extra rolling stock. Further action is also needed on planning controls. Businesses should be free to operate in uncongested, out-of-town locations, even if this means fewer people using public transport.

A radically different policy on investment is needed. Ideally it should be left to the private sector, which would only undertake rail schemes that were commercially viable. However, in the absence of a larger role for private investors, the government should take a far more rigorous economic approach to new infrastructure.

This article originally appeared in City AM.

Richard Wellings was formerly Deputy Research Director at the Institute of Economic Affairs. He was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

4 thoughts on “The government is off track with its uneconomic transport policy”

  1. Posted 17/07/2012 at 15:01 | Permalink

    I agree with the sentiment and detail of the vast majority of this article – clearly the government is further subsidising uneconomic railway routes, and state-dictated rail plans are unlikely to lead to new prosperity in depressed regions. However, the point regarding political distortion of demand in the transport sector is arguably more problematic. Is it not reasonable to argue that higher VAT and fuel duty represent less the creation of unfair competition, and more the internalising of a significant negative externality in the form of greater pollution from car travel? If trains are generally accepted to be a ‘cleaner’ form of transport that suffer from lower demand due to their relative expense, then isn’t some form of government intervention to deliver a social benefit justified (even if not the route followed presently)? Deliberate demand-distortion to boost public transport, whilst not ideal, can surely under some circumstances be justifiable if the negative externalities from private transport are accepted.

  2. Posted 17/07/2012 at 17:02 | Permalink

    @Dan Tor – I agree that the externality issue is problematic, in terms of the methodological difficulties in measuring costs, for example, and the extent to which such costs are contingent on other forms of government intervention (e.g. planning controls). However, if this (flawed) approach were rigorously applied then taxes would be imposed on rail travel to reflect the negative externalities it produces, such as noise, pollution etc.

  3. Posted 24/07/2012 at 08:30 | Permalink

    The Coalition is now in exactly the same position ideologically as the previous government. They believe that spending is good in its own right and it doesn’t matter what the money is spent on as long as it is spent. That is why there has been so little rigorous analysis of the benefit of these schemes; they don’t care just as long as taxpayers’ money is going out of the door. You only have to look at Spain to see the fallacy of this argument.

    This spending also completely undermines the government’s commitment to reform of railway procurement to get better value for money. It is only by reducing the total money available that the railway industry will innovate and squeeze out waste. In the bonanza for contractors that has just been announced, there will be no such pressure.

    Most ridiculous of all is George Osborne’s position. When first made Chancellor, he cut all these projects because of the financial emergency. Now that emergency has got worse, he has reversed those cuts. He position would seem to be that infrastructure spending is good if you can afford it, bad if you cannot and good if you really, really can’t afford it.

  4. Posted 13/07/2013 at 14:20 | Permalink

    Government need to make better transportation policy for the people. It will help people to avail a better transportation facilities. A huge amount of money government invests for the development of public transportation whenever it required. Whether the construction of railway tracks or the construction of roads, Government has pay a lot for it. So at the end of the these areas has to be improved and government need to look after it whether things going well or not. Government need to check whether the construction company doing the work properly or not and whether any worker doing there job perfectly or not.

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