Inefficient railways

At the IEA blog Richard Wellings has been looking at the reasons for the state of Britain's railways. He notes that for many people the recent history of Britain's railways has brought the whole concept of privatisation into disrepute. But he argues that this is unfair as rail privatisation was a pastiche of genuine privatisation – in many ways it actually increased the level of state control. He writes,

Last week’s McNulty Review estimated that costs are about 40% higher on Britain’s railways than comparable European networks. Taxpayer subsidies, adjusted for inflation, have probably more than tripled since the British Rail era – reaching around £7 billion per annum. As McNulty explained, higher costs are to a large extent the result of the fragmentation of the industry. A vertically integrated industry was split up, with different firms managing the infrastructure, running the trains and leasing the rolling stock. As a result, transaction costs mushroomed.

It is a myth, however, that fragmentation was the result of privatisation per se. The government imposed an artificial structure on the industry from above. Indeed, when train operators subsequently approached the government with a view to taking ownership of the track, they were rebuffed. Moreover, the regulations imposed on the ‘private’ rail industry made it virtually impossible to close loss-making lines, while franchise agreements with train operators effectively forced them to continue running uneconomic services.

By contrast, the structure of a rail industry under genuine private control would be determined by market forces. Historical experience suggests that vertical integration would predominate. This may be explained both by the desire to minimise transaction costs and the relatively high degree of asset specificity on the railways (for example, rolling stock is often designed for use on particular routes). Moreover, genuine private owners would be free to close uneconomic lines and cancel loss-making services. Freed from government price controls, they could set fares to address overcrowding. Expensive new capacity would be funded by fares and land development rather than taxpayers (many of whom never use the railways).

Much of this argument would apply with as much force to the situation with rail privatisation in New Zealand. Here as in the U.K. the government tired to undo vertical integration which history suggests occurs for good efficiency enhancing reasons. Also it was also difficult for private owners of rail in New Zealand to close loss-making lines. The result in New Zealand, as in the U.K., showed that privatisation done badly gives bad results.