Why railway renationalisation must be sent to the sidings
In the context of Jeremy Corbyn’s plan to renationalise the railways, it is worth recalling some facts. Some good things have happened on the railways that simply would not have happened had they been nationalised. But, at the same time, the network is strangled by the nationalisation of the infrastructure. I have been interviewed on the issue with people who seem blissfully unaware of the fact that the railway network is nationalised and it is only the operation of the train services that is put out to tender.
1. When the rail network was privatised the government followed a gold-plated interpretation of an EU directive and split the operation of the tracks and other aspects of the network from the operation of the trains. In other words, the government imposed an industrial structure on the railways that had never evolved naturally in a free market. The transactions costs of separating tracks from trains turned out to be huge. We need a market to determine how vertically integrated railways should be. In the past, we have had markets in railways and the markets certainly did not discover that tracks and trains should be operated separately.
2. The tracks were renationalised in the early 2000s. The main problems on the railways are now caused by the nationalised part of the system. About 70 per cent of delays are caused by Network Rail. Over-crowding can hardly be blamed on the operating companies as where tracks lack the capacity to take more trains: there are simply no more routes into stations such as Victoria. This may be a problem that is too costly to solve, but it is not caused by the operating companies.
3. Not only can nationalised Network Rail not deliver trains on time, it cannot even deliver its own projects on time. Despite having a debt about the same size as that of the Slovakian government, an ORR report showed that more than a third of the milestones on major projects have been missed; fewer than one in four of the renewals to overhead lines scheduled for this year have been carried out; and only a third of signalling works have been completed. Despite not completing the work it should have completed, it has missed its budgetary targets by nearly £0.5bn.
When it comes to the performance of the train operating companies (TOCs), it is spuriously argued that, if only they were nationalised, the government could plough back their profit margins into lower fares. This assumes, of course, that taxpayers would demand no return at all on the capital invested in train operation. This would be a somewhat unique situation and hardly likely to be proposed or accepted by any government. The current profit margin for train operating companies is around 3 per cent. If the government were to take over the TOCs and make no margin at all (something which would lead to a rapid deterioration in the train stock) fares could be reduced by only 3 per cent.
On at least three measures there have been huge improvements that can be laid at the door of the privatisation of train operation. The first is in safety. I remember, not long before privatisation, sitting on an up-turned brief case with 40 other people in an unlit guards van of a train after yet another failure of the pre-First World War signals at Neasden: that was dangerous. There has been a huge reduction in accidents since privatisation, to a large degree caused by the complete replacement of almost all the train stock. This would have been unimaginable if the operating companies had been state owned and subject to the political manipulation of capital spending budgets that we regularly see.
Secondly, there has been a huge increase in traffic. Rail journeys have doubled since privatisation and grown much faster than in comparable countries. The average price paid per passenger mile has increased by only around 7 per cent adjusted for inflation since the mid-1990s whilst the TOC’s profit margins have fallen.
So, what is there not to like? Overcrowding and high prices are the two answers normally given to this question. When it comes to overcrowding, the blame can generally be pinned on Network Rail. However, things are not necessarily easy for Network Rail. Are people willing to pay the price (the monetary price and the inconvenience cost) of ventures such as the London Bridge project that are necessary to increase capacity? When it comes to pricing, the increase in the average price per journey is not that huge. However, there is much better price discrimination with many cheaper fares available for those who have a low marginal cost of time and less money to spend. This is purely a result of the marketing strategies adopted by the operating companies, something that would have be unimaginable had they been nationalised.
Things could be much worse. But, they could be better. The government should liberalise pricing. The government should also allow the vertical integration of the network with the operating companies again. There will be benefits both from the network being in private hands and also from the businesses themselves being allowed to determine the appropriate degree of vertical integration. Let’s hope that is the conclusion of the Nicola Shaw report.
Prof Philip Booth is the IEA’s editorial and programme director, and professor of finance, public policy and ethics at St Mary’s University, Twickenham.