All Commentary
Tuesday, April 11, 2017

British Trains Are Broken, but Not Because of Capitalism

Train operators have little control over their businesses.

British commentator Owen Jones was published yesterday by the New York Times, with a piece entitled “Why Britain’s Trains Don’t Run on Time: Capitalism.” I’ve learned through experience not to judge articles by headlines, but this one seems especially curious, given 89.1 per cent of trains were, in fact, on time in 2015/16—a figure that has improved somewhat since 1997, just a couple of years after some of British Rail was part-privatized.

If drivers control the doors, conductor strikes will no longer be able to bring down whole services.

Yet aside from the bizarre opening assertion we might judge the state of a nation by how the railways run, the purpose of the article and headline soon becomes clear: to push the case for the British left’s hobby horse—full renationalization of Britain’s rail industry.

The hook this time is the dreadful ongoing dispute that has been rumbling for almost a year between Southern Rail and the rail unions, resulting in the substantial strike action Jones cites. For those uninitiated, the dispute mainly centers around a proposed business decision by Southern rail (a train operating company granted the running of trains between London and the south coast by government) to reassign the duty of operating train doors from conductors to the train driver, allowing onboard conductors to focus solely on dealing with passengers. The unions fear this because they believe it will render the role of conductors obsolete, and reduce their power. The reason is simple. If drivers control the doors, conductor strikes will no longer be able to bring down whole services.

Yet rather than judge the strikes on this naked self-interest, Jones suggests that somehow they are a consequence of privatization and of letting “market ideology into key public services.” He then throws everything but the kitchen sink at private involvement in the railways, implying that privatization is responsible for high prices, underinvestment, substantial government subsidy, and inefficiency.

For some commentators, particularly on the left of the UK’s political spectrum, increasing prices and the fact that privatized companies make profits are evidence enough that the blame for rising costs to consumers can be laid squarely at the door of privatization itself. Jones’ article is the latest in a long line of misleading, potted histories, which utilize any problems as a hook to push for public ownership.

Nationalization After World War II

To understand why the article is misleading, one needs to consider what “privatization” of the railways in Britain actually entailed. Virtually all of the UK’s rail network was privately built and operated for more than 100 years before its nationalization following World War II. But the 1995 reforms did not return to this framework. Instead, the government imposed a top-down model of separating track and train, with the former kept nationalized and operation of the latter franchised out on a regional basis, such that firms could compete to operate a line for a set contracted period. This was supposedly to deal with the natural monopoly problem, but in reality fragmenting the sector eliminated potential economies of scale and scope, whilst introducing additional transactions costs. The train operating companies, who run the franchises, remain heavily regulated, having to meet certain government conditions and being very restricted in many cases on pricing.

The move to this model has certainly had mixed success. Passenger numbers have exploded since the part-privatization of the trains, and (as Ben Southwood shows here) this does not appear to be at the expense of customer satisfaction or safety, nor driven purely by economic growth or regional development. Yet undoubtedly the degree of government subsidy remains high, as do overall prices.

There is no evidence, however, that it is privatization or capitalism that is to blame for either the current strikes or high prices.

Government Failure

What Jones omits to tell readers is that the current situation with Southern is different to other ordinary franchises. Poor performance led to an effective merger and reorganization for the running of the line in 2015. Unlike with ordinary franchises, the government simply pays Southern’s parent company, Govia Thameslink, to operate the line and the company pays any revenues to the government. Southern has no control over prices or conditions for staff. In essence, the government is already the patron for the line, so the company has little incentive to end the dispute and the strikers are emboldened. Indeed, Britain has a long history of widespread strikes in government-owned enterprises, as anyone who lived in or studied the 1970s can attest. It is unclear then why nationalization is regarded as a solution to that problem.

The whole idea that nationalization could somehow deliver cheaper fares is pure fantasy.

Out-of-pocket rail prices in Britain do tend to be higher than in many other countries. The unions exaggerate this by comparing “on the day” prices, when many British routes offer significant discounts for advanced bookings. Nevertheless, previous detailed research has found rail fares per passenger-kilometer are on average around 30 percent higher in Britain than in comparable Western European countries.

There are many reasons for this. In part, it is because Britain has deliberately shifted to a user pays system compared with others (though even then there is still around 25 percent subsidy). This is both more economically sound and also equitable, given those who use the railways tend to have relatively high incomes.

Indeed, the whole idea that nationalization could somehow deliver cheaper fares is pure fantasy. Even if we assume that the railways would be as cost effective in public ownership, profit margins for train operating companies tend to be around just 3 to 4 percent. The ‘savings’ from no longer paying out dividends to shareholders would simply not be large enough to fund a significant reduction in fares. The average household spends approximately £64 per week on transport, but only about £3.30 is spent on train fares, suggesting fare reductions would do little to boost real living standards either.

What are the alternative explanations for why fares tend to be high? Geography is one. The high share of rail travel involving trips to and from London—a vast and expensive global city—raises costs compared with other countries. The structure imposed on the industry is a second, negating the potential benefits of vertical integration. Wasteful uneconomic new infrastructure spending is a third key reason, with plans now to push on with High Speed 2, an expensive new planned rail line through the west coast.Given the legacy of government-owned enterprises in the U.K., the results would likely be more rent-seeking, industrial strife, and poor cost control.

That’s not to say the current model does not have other problems. The high degree of price regulation contributes directly to the overcrowding problem, as the train operating companies cannot price discriminate and smooth usage. And the nature of the franchise system can deter investment in some circumstances (why invest significantly if you suspect you might lose the franchise?). But these are details, rather than fundamental flaws of allowing private companies to run railways.

As Britain’s history shows, private companies can and have run railways successfully. The part-privatization seen since 1995 could undoubtedly be improved upon, not least through allowing the integration of track and train and greater freedom in setting prices. Yet there is no reason to suspect nationalization would produce better results than the status quo. Indeed, given the legacy of government-owned enterprises in the U.K., the results would likely be more rent-seeking, industrial strife, poor cost control, a lack of entrepreneurship, more political interference, and an endemic misallocation of resources.

Republished from the Cato Institute.