Debate with Richard Wellings on rail nationalisation

Christian Wolmar

Since 1994, when John Major began splitting up British Rail, the state-owned enterprise, into dozens of companies, Britain’s trains have been largely privately operated. But Network Rail, which manages the track on which they run, is in state hands. The decision to privatise the railways and the manner in which it was carried out have always been controversial, no more so than now, as more people are using the rail network than ever before. Recently, the Labour leadership contender Jeremy Corbyn called for Britain’s rail to be renationalised.

It is not surprising that the railways were one of the last industries to be privatised. Even Margaret Thatcher counselled against it, and for once she was right. Privatising an industry that is not only dependent on subsidy but which provides an essential social service makes no sense at all.

And so it has turned out. In the first years of privatisation, safety was compromised through a series of hasty and ill-thought changes, a period that coincided with the accidents at Southall, Ladbroke Grove, Hatfield and Potters Bar.

The railways absorb around £4.5bn of taxpayers money each year—three quarters of this is spent on investment, and the rest on supporting loss-making services. The aim of privatisation was to do away with subsidies, but its effect has been to double them. Much of this is down to the fragmentation of the industry, created to stimulate competition in a sector that is a natural monopoly: for the most part there is only one track in each direction which makes having rival train operators wasteful. The separation of infrastructure from operations was intended to stimulate competition—but it turned out to be the most damaging mistake of all. Creating a contractual relationship between the infrastructure provider—first Railtrack, now Network Rail—and the train operators has added vast costs to an industry that operates far better as an integrated whole.

One neat example. In August, there was a hearing into the use of the East Coast Main Line. Rival firms are seeking more train lines but the sole franchisee, Virgin, is objecting. The hearing was attended by 67 people, of whom 23 were from the Office of Rail and Road Regulation and the Department of Transport, and QCs were representing various sides—is this a way to run a railway?

Richard Wellings

The problems you identify are the result of government intervention rather than privatisation. It is difficult to see how further renationalisation would reduce the negative impact of political meddling. In the rail reforms of the 1990s, ownership was nominally transferred to the private sector, but the government retained control over the industry through a regime of heavy regulation combined with increasing degrees of direct political interference. Rail firms effectively became subcontractors for the state. The scope for entrepreneurship, innovation and productivity gains was severely limited.

A genuinely private and free-market railway would never have evolved the dysfunctional structure that the government imposed on the industry (partly in response to EU directives). The rail pioneers of the 19th century quickly realised that separating track from train created huge inefficiencies. As you point out, this state-mandated fragmentation has pushed up costs substantially, adding to the subsidy burden. The major beneficiaries have been the armies of bureaucrats, lawyers and consultants that have cashed in on the resulting complexity.

One area where the private sector has been far more successful than British Rail is in lobbying for government cash. The true level of subsidies is actually worse than you acknowledge. Including Crossrail and High Speed 2, it is roughly £6bn a year. Taxpayers are also saddled with the long-term burden of Network Rail debt, which has now reached an astounding £38bn.

Much of the additional spending has been directed towards upgrades and new infrastructure, which in part reflects a change in government policy. From the 1990s onwards a strategy of managed decline was replaced by an agenda that promotes public transport, a shift that partly explains the substantial increase in rail use over the last twenty years. Again, this is not a market outcome but the result of elitist, top-down decision-making by politicians and senior officials. The loss-making (in commercial terms) rail infrastructure projects that have driven up subsidy levels would never have been funded by private investors.

Christian Wolmar

The idea that the problems of the railways come from too much government intervention is fanciful. The railways can never be an unregulated free market industry for three reasons. First, they are constrained by physical limitations. There is no scope for increasing capacity without vast amounts of investment. This will never come from the private sector (you may have noticed, there is not a queue of companies willing to invest in HS2.) Secondly, railways have a monopolistic control over commuter lines. Simply allowing market pressures to push up ticket prices for, say, people coming into central London would cost thousands of jobs and wreck towns and suburbs that are dependent on the wages of the commuters.

Thirdly, the railways provide a key social service for people without access to cars and even many who do. Many people would simply not be able to travel without fares being kept down through subsidy and regulation.

Given these constraints, the logic is simply to cut out the “faux capitalism” as I have termed it, and give the railways over to a government corporation, which acts at arms length from the Department for Transport, as was the case with British Rail. This would reduce costs, speed up decision making and enable the rapid reintegration of the railways which you advocate.

Your free market solution is poor economics. Government is involved in the railways because they create vast externalities that benefit both individuals and companies. A free market railway would only reflect the direct costs and benefits of train travel. So, for example, if freight had to pay the full costs of rail travel, millions of tons of building materials would be put on to the roads, causing congestion, pollution and damage to road infrastructure. Your free market obsession takes no account of such consequences.

Richard Wellings

It is naïve to think that an arm’s length government corporation would put an end to political interference. Network Rail was supposed to be independent, but in reality its ill-fated investment decisions were driven by politics and special interests. The current crisis is the predictable result. As long as the Treasury is funding major investment, harmful politicisation is inevitable.

Network Rail also shows (yet again) that nationalised industries are plagued by inefficiency and poor incentives to control costs. Moreover, their lack of entrepreneurship stifles innovation and hinders the productivity improvements that deliver better services for less money. The only effective way to deliver major efficiency gains and get politics out of the railways is to set the industry free through genuine privatisation.

A combination of new technology and flexible pricing can address most capacity issues. But if new infrastructure made commercial sense, the private sector would provide it, particularly if allowed to develop land along the route. The construction of Britain’s rail network was funded by private investors.

Monopoly fears are overblown. Rail carries a small fraction of passenger and freight traffic, and even in the London commuter market there is competition from other modes. A rail firm that overcharged would be shooting itself in the foot, particularly in an era of teleworking. It would also dissuade people from moving their home or business to an area served by a more expensive line.

Social concerns are also unconvincing. Rail users are on average far richer than the general population. Subsidising long-distance commutes from the stockbroker belt is not a good way of helping the poor. Yes, there are benefits to railways that are not fully captured by fares. But what about the significant wider costs, including noise, air pollution and the obstruction of other transport networks? State intervention comes with its own very substantial costs—not just political meddling but also the negative effects of the tax bill.

Christian Wolmar

To say you are living in cloud cuckoo land is unfair to cuckoos. You have been utterly unable to sketch out anything like a workable model for the railways based solely on the private sector.

Take your example about a rail firm that overcharged. I presume you are familiar with the concept of elasticities. For people who have to commute to work, the elasticity is very low—in other words, however much the fares were raised, a person commuting in from Woking or Surbiton would have no alternative than the train. A profit-maximising private firm would simply milk this monopoly market.

Moreover, although you claim to understand the concept of externalities, you clearly do not. Virtually all new rail infrastructure is paid for by the state for a good reason: the benefits cannot be captured through fares because they relate to matters such as reduced congestion, cuts in air pollution, fewer road accidents and so on. Your free market model does not take account of those factors and therefore is fatally flawed.

Yes Network Rail has inefficiencies as do all large organisations. Would you say that banks, those bastions of free enterprise, have excelled themselves in the past decade or two? Government intervention is inevitable in the railways, so one might as well make the structure simple. A nationalised rail industry, integrated and run for the benefit of passengers, not profit, is a no-brainer.

Richard Wellings

You seem to have bought a return ticket to the 1970s, forgetting this isn’t a destination any sensible person would wish to revisit. The failures of nationalised industries have been brushed under the carpet and you haven’t explained why it would be different this time round. Network Rail is a reminder that poor management, perverse incentives and wasteful investment are in the DNA of state-owned firms.

The real solution lies in the opposite direction. Deregulation would encourage the entrepreneurship and innovation needed to improve services, widen choice and cut costs. Layers of bureaucracy and unnecessary complexity would be eliminated if track and train were allowed to re-integrate.

Most importantly, the burden that the railways impose on taxpayers could gradually be lifted. It is an economic error to focus on the concentrated benefits railways bring to passengers while ignoring the dispersed costs of state subsidies to the wider economy. Similarly you show little comprehension of the market feedback mechanisms that work to mitigate potential monopoly problems—for example by encouraging competition from other modes. And while alleged market failures can be addressed efficiently in theory, the practical reality of government intervention creates more problems than it solves. Subsidies and regulation inevitably lead to political meddling and capture by special interests.

Finally, please don’t confuse crony capitalism with free markets based on voluntary exchange. The special privileges of a banking sector dependent on central bank inflation, barriers to competition, bailouts and state guarantees are no more free-market than your British Rail Mark 2.

  • Paul Holt

    Credit to both sides for having the debate. Further credit to CW for publishing it.

  • Brimstone52

    Most arguments regarding nationalisation and privatisation confuse ownership with management. When legislative/government interference is added to the mix then unravelling the mess becomes even more difficult.

    It really doesn’t matter who owns a particular enterprise. What matters is who manages it. From the 1840s until WW1 the railways were entirely privately funded and owned and yet government insisted on interfering, restricting their charges and dictating what trains they had to run when.

    After WW1 road transport became viable, thanks to war driven vehicle developments, at which point government imposed Common Carrier status on the railways but not on road transport operators. It appears there were no restrictions on road operators, apart from the need for the driver to hold a licence.

    I offer the following as background reading.

    A Potted History of Transport.

    Until we started building new roads in the 1920s, the only road that central government had decided to improve and develop was the one between London and Holyhead.

    That was after Ireland became part of the Union and started sending their MPs to Westminster.
    If you were to deduce that the reason for the road being improved was so that those MPs could travel in greater comfort and quicker between Westminster and their constituencies you’d be right. Even so, it took some twenty years for the improvements to be completed.

    Prior to that, the only government to have a national transport policy were the Romans (I kid you not). There were various Acts of Parliament imposing duties on parish councils, but it was all
    piecemeal.

    Things improved a bit under the various turnpike trusts, but they were little more than local companies owned and operated by local bigwigs who saw a chance to make some money.

    Because of the state of the roads, people looked at ways of transporting materials and goods more cheaply. The Duke of Bridgewater had coal mines at Worsley. He got a chap called Brindley to build a canal in to Manchester. A pack horse can carry about a quarter of a ton, or pull about fifty tons on still water.

    Other people saw this and decided to build their own canals in various parts of the country. Did the government step in and suggest that it would be a good idea if they were all built to a common standard, i.e. same minimum width, length and depths for boats? Nope, they sat on their butts and did nothing, except lay down how much the canal companies could charge for various types of cargo.

    In the late 1700s/early 1800s a number of people invented steam carriages (to displace horses). Rather than improve the roads to take the additional wear and tear, the government and other bodies priced them off the roads. This is before the use of a steam locomotive on rails was thought of (that was c 1803).

    When people wanted to build railways, again, the government’s contribution was to impose restriction on what they could do and how much they could charge. For example, a railway company usually ends up buying more land than it actually needs for the line of the railway and
    associated yards, stations, works etc. In the UK, they have to sell it back to the original landowner at the same price. In other countries they can retain it and develop the surplus land to their own benefit, i.e. build shops, houses etc.

    The one exception to this was the Metropolitan Railway (now the Metropolitan Line of London Underground) who found a way round it (they were building their railway somewhat later than
    most). Hence the north-west London suburbs known as “Metro-Land” came into being.

    Another example of a restriction on the railway was the requirement for them to be “common carriers”. This meant that their rates had to be published and could not be varied, nor
    could they refuse a load.

    After WW1, the government sold off lots of surplus lorries. Lots of soldiers had wads of cash, demob money. Many soldiers bought lorries and set themselves up as haulage companies. Unlike the railways, they could charge what they liked to whoever they liked and could refuse a load if they chose.

    To illustrate that, here’s an example. A company has made a machine for delivery to another town some distance away. The manufacturer looks up the railway’s rate. It’s a high value
    load, so attracts a high charge (set down by government remember).

    The manufacturer approaches a local lorry operator and asks for a quote. He offers to take it for a lot less than the railway, but refuses to bring back the empty crate. The manufacturer then
    contacts the railway to arrange for the empty crate to be collected and sent to the factory. It’s of low value so is charged at a low rate. If the railway had moved the high value load as well as the low value, they would have been better off.

    Until nationalisation, the railway companies were transport operators providing road, sea, docks and air services, mostly in support of the railway. However, they were not permitted to provide
    long distance road services.

    This “common carrier” requirement lasted until the late-1950s, some ten years after nationalisation.

    I have seen it suggested that railway transport rates were held at a low level during the 1930s to provide a hidden subsidy to British manufacturing.

    Another failure at the time railways were first being built was that no one took the time and trouble to find out how wide a vehicle could be beyond the track gauge nor how high it could be.
    Consequently, we now have to run some of the smallest standard gauge vehicles in the world. Others learnt from our mistakes despite most other countries railways being built by British engineers. (The current safe limit for a loco or coach is three times track gauge, look at Chinese rolling stock.)

    Since nationalisation, the railways have been expected to make a profit, or at least pay their way. There is no such requirement on the road network. A few years ago, the Treasury introduced
    a requirement that before a public transport improvement could be given the go-ahead, account had to be taken of any reduction in car and lorry fuel tax from the reduced car use, and from the reduction in congestion (i.e. vehicles burning less fuel because they were no longer sitting in queues).

    As we all know, BR received a grant (usually called a subsidy by the press) to run those services deemed socially necessary but unprofitable and many lines were shut. (No one has suggested that any particular road that carries very little traffic should be shut.)

    Thatcher explored privatising the railways, but Nicholas Ridley, one time Secretary of State for Transport amongst many other government posts, advised against it and to leave it alone. Ridley was one of those in favour of privatising anything and everything. As we all know, Thatcher was ousted and John Major was accepted by all sides of the Tory Party before the 1992 election.

    Major and co were determined to privatise the railway. The only decision to be made was how. There were a number of options.

    1. Sell it off as a single company (i.e. BR PLC).
    2. Revert to the “big four” railway companies of the 1923-48 period
    3. Sell it off piecemeal.

    This last is what happened.

    So, rather than one or more large companies (BR PLC or the four separate companies) we ended up with a series of companies, one (Railtrack) who owned the property, a number of companies who maintained it, a number of companies who owned the trains and more who
    maintained them and then the companies who operated the trains (who own nothing, except their staff).

    This meant that for every job that needed doing, a contract had to be raised, invoices sent out and all the other bureaucracy needed to run a business. Add to that increasing health and safety,
    mostly because those who took over the various operations from BR didn’t have a clue about the safety requirements needed on a railway, and it’s no wonder that costs have gone up.

    Before the 1997 election, Labour promised to renationalise the railways, but as we know, they didn’t.

    Fortunately, some sense seems to have crept in somewhere, although I suspect it’s more about increasing profits, but there have been mergers and an increase in co-operation in recent years.
    However, under BR if the boss said a job needs doing, it got done. Now there is an endless stream of paperwork.

    The total proceeds to government of the privatisation were some £5.3 billion. That’s roughly what is now being paid to the industry in subsidy, per annum.

    When the Newcastle Metro system was built, the local council developed an integrated transport system. The buses fed into the Metro which fed into BR, the fares were on a zonal system. It was easy to use and people did so in large numbers.

    Thatcher and co decided that the market should rule the bus industry, so it was de-regulated. Again, restrictions were put in place. There had to be competition between different operators, they were not allowed to co-operate and fares on a profitable route could not be used to subsidise an unprofitable route. Under this, the Newcastle zone system was dismantled and buses and Metro had to compete.

    Bus ridership outside London, (the only place not de-regulated) has been falling year on year since privatisation.

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