Analysis

Rail privatisation as a policy has failed on two levels. The first is commonly acknowledged and centres on higher costs, fares, public subsidies and grants. The second is less widely discussed and relates to the unwillingness of successive rail reforms to correct these problems; and instead, to continue promoting privatisation as a solution. Part of the explanation for the continuation of basic problems comes from the belief that failure was due to poor implementation rather than privatisation per se. The poor implementation includes excessive fragmentation associated with the separation of infrastructure from operations; the rushed implementation of the franchise system; and regulatory failure.

A more important explanation for the second failure is that privatisation itself is highly political. The introduction of rail privatisation, and in particular the specific mode of privatisation that reversed over 150 years of industry consolidation, was driven by political ideology and sustained by vested economic interests. Successive rail reforms were similarly motivated, thus continuing to promote a fragmented rail system. These interests derive from train operating companies (TOCs), rolling stock companies (ROSCOs), and thousands of railway maintenance and infrastructure companies in the subcontracting chain that rely on and help justify the existing privatised rail structure for the purposes of value extraction.

Underlying failures of rail privatisation and rail reforms is the unwillingness of governments to prioritise rail and public transport in order to fund capital investment. The result has been a series of policy obfuscations to keep the cost of railway infrastructure off the government’s balance sheet, initially through subsidies to TOCs to pay for track access charges, and subsequently through increased borrowing by Network Rail to compensate for reduced track access charges. This raised Network Rail’s net debt from £6.3b when it replaced Railtrack in 2002 to £46.3b (2016) with £1.7b in interest payments.

The case for rail renationalisation centres on savings from reintegration; improved monitoring of performance; and financing rail infrastructure.

Savings from reintegration

The higher costs of privatised rail are associated with the forced introduction of competition that increased interface costs and leakages due to industry fragmentation, and profit extraction by the private sector. Savings from costs associated with leakages, interfaces, duplication (in terms of administration, management, marketing, and franchise bidding), and dividend payments have been estimated by the TUC at £80m/year (2015/16) increasing to £600m/year (2019/20).

Improved monitoring

Regulation is central to ensure efficiency gains are made and performance and investment targets met, particularly as operating subsidies and capital grants weaken private incentives. However, the limitations of monitoring associated with asymmetric information are compounded by a highly fragmented rail network that has created an unnecessarily and overly complex regulatory environment. Renationalisation in this context offers the benefits of simpler and better regulation through integration and easier access to (public) information necessary for effective monitoring.

Financing rail infrastructure

A publicly owned railway will not be sustainable in the context of decades of public underinvestment and capital financing based on narrow accounting principals and conventional economic costing. Railway systems are unable to pay for themselves given the very large disparities between infrastructure costs and socially acceptable rail fares. The UK already has the highest fares in Europe. Railway financing will need to be based on the wider benefits of rail linked to reducing road congestion, pollution and carbon emissions, while improving social access and mobility. These society-wide benefits should override narrow business models centred on simple cost recovery and profitability if rail infrastructure is to be properly financed.



Policy Framework

Rail renationalisation will work if it addresses both issues of industry fragmentation and the funding of rail infrastructure. The underlying principles behind rail renationalisation should thus centre on network reintegration and the public financing of infrastructure based on the society-wide benefits of rail travel. Three key aspects of rail renationalisation may be identified.

A. Renationalise TOCs and ROSCOs

Central to renationalisation will be the elimination of train operating franchises, ROSCOs, and the subcontracting chain by

not renewing TOC franchises when these expire, replacing private ROSCOs with a public ROSCO or integrating this function as part of Network Rail; bringing all engineering and maintenance work in-house for Network Rail (and the new public ROSCO); and vertically integrating Network Rail’s supply chain.

B. Rail infrastructure financing

Proper and transparent public funding of capital expenditure must be based on:

linking funding for capital investment to wider society-wide benefits related to lowering road congestion, pollution and carbon emissions, and securing economic regeneration; separating operational costs from capital costs, with the former subject to strict monitoring for performance and efficiency gains, and the latter taking into account positive externalities; and publicly funding capital investment and keeping this on the government balance sheet rather than through borrowings in order to normalise capital expenditure and to make this transparent.

C. Institutional coordination and alignment

The wider social and environmental benefits of the railway will depend on