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.

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