Tag: privatisation

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Rail reorganisation


Back in October 2020 in the blog All change for the railways, we looked at the emergency measures for running the railways in Great Britain following the collapse in rail traffic because of the COVID-19 pandemic. We also looked ahead to plans for reorganising the railways, with the expectation that the current franchising system would be scrapped and replaced with a system whereby the train-operating companies (TOCs) would be awarded a contract to run rail services. They would be paid a performance-related fee. All ticket revenues would go to the government, which would bear the costs and the risks. While this would not be quite renationalisation, it would, in effect, be a contract system where private companies are paid to deliver a public service.

The Transport Secretary, Grant Shapps, has just announced the new system in a White Paper, which is indeed the anticipated contract system. The White Paper has drawn on the findings of the Williams Rail Review, independently chaired by Keith Williams.

The new system has the following features:

  • A new public-sector body, Great British Railways (GBR), will be created which will eventually absorb Network Rail.
  • GBR will produce five-year business plans. It will also develop a 30-year strategy to shape the long-term development of the railways and will include plans to decarbonise the whole rail network.
  • It will be in charge of planning and operating rail infrastructure in England, including track, signalling, stations and depots.
  • It will work closely with the devolved rail authorities in Scotland, Wales, London, Merseyside, and Tyne and Wear.
  • It will set timetables, plan train operations, set most fares, sell tickets (at stations and on a new dedicated website) and collect revenues.
  • The ticketing system will be reformed, with a single integrated system of fares across England, and potentially the devolved rail authorities too. The website will show the best and cheapest options for any given journey. New flexible season tickets will be introduced, allowing workers to travel on limited numbers of days: e.g. eight days in any 28-day period. Also, a new single compensation scheme will simplify the system for refunds.
  • Private train-operating companies (TOCs) will run trains over particular routes. They will bid for Passenger Service Contracts (PSCs), which will be awarded by competitive tender. They will be paid a management fee, rather than receiving revenues from ticket sales. The fees will include performance incentives and penalties, which will depend on meeting targets for punctuality, reliability, safety and cleanliness.
  • Rolling stock (trains, locomotives and freight wagons) will continue to be procured from the private sector, which will generally be leased to TOCs. It is hoped that by awarding PSCs for a number of years, TOCs will be encouraged to make large-scale procurements of rolling stock.
  • GBR in England will be divided into five regional divisions, which will be ‘accountable to customers for their journeys; manage PSCs, stations and infrastructure; procure private partners, such as operators and contractors; manage budgets both locally and regionally; integrate track and train at a local level; work with and be responsive to the needs of local and regional partners, and integrate rail with other transport services’.
  • GBR will be held to account by the Office of Rail and Road (ORR), which will monitor its performance.

In its White Paper, the government has recognised that, in many ways, rail privatisation has failed. Page 13 states:

Breaking British Rail into dozens of pieces was meant to foster competition between them and, together with the involvement of the private sector, was supposed to bring greater efficiency and innovation. Little of this has happened. Instead, the fragmentation of the network has made it more confusing for passengers, and more difficult and expensive to perform the essentially collaborative task of running trains on time.

But will the new system bring a better integrated, more efficient, punctual, reliable and greener railway, with more investment, an enlarged network and lower ticket prices? These are certainly aims of the White Paper. But a lot will depend on the details, yet to be finalised.

Crucially, it is not clear the extent to which the rail system will be subsidised. Will any subsidies internalise the positive externalities from rail travel? Also, it is not clear exactly what incentives and penalties will be introduced to encourage efficiency, punctuality, safety and cleanliness.

What is also not clear is the degree of contestability of rail routes and freight operations. Routes are contestable at the time of bidding for PSCs, with more efficient companies able to outbid the less efficient ones. But with changing conditions and the desire to maintain contestability, contracts need to be relatively short. However, it contracts are too short, there is no incentive for TOCs to invest in trains and infrastructure. Thus inherent in the PSC system is a tension between competition and investment.

It does seem that fares and tickets will be simpler, with greater use of ‘tapping in and out’ as in London and in many other countries, allowing fares to be capped when multiple journeys are made in any given time period. Ultimately, however, it is price, frequency, punctuality, comfort and reliability that are the crucial metrics. Success according to these will depend on how well GBR is run, how well the PSC system operates and how much the rail system is subsidised. The jury is out on these questions.

Video

Articles

Documents

Questions

  1. Explain how the franchising system has worked. What problems have arisen with this system?
  2. If the proposed new system also involves contracts being awarded to train-operating companies, how is it better than the old franchising system?
  3. What were the Emergency Measures Agreements (EMAs) introduced in the pandemic and the Emergency Recovery Measures Agreements (ERMAs) which replaced them in September 2020? How similar are they to the proposed system of Passenger Service Contracts (PSCs) with train-operating companies?
  4. Identify the externalities involved in train travel? What is the best way of internalising them?
  5. Argue the case for and against making train travel cheaper by increasing subsidies.
  6. To what extent are individual rail routes natural monopolies? Does a franchising system overcome the problems associated with natural monopolies?
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All change for the railways

The UK rail industry was privatised by the Conservative government in the mid-1990s. As Case Study 14.8 on the Economics 10th edition website states:

The management of rail infrastructure, such as track, signalling and stations, was to be separated from the responsibility for running trains. There would be 25 passenger train operating companies (TOCs), each having a franchise lasting between seven and fifteen years. These companies would have few assets, being forced to rent track and lease stations from the infrastructure owner (Railtrack), and to lease trains and rolling stock from three new rolling-stock companies. …In practice, the 25 franchises were operated by just 11 companies (with one, National Express, having nine of the franchises).

In 1996, at the start of the franchise era, the train operating companies were largely private-sector companies such as National Express, Stagecoach, Virgin Rail and Prism Rail. By 2020, most of the franchises were operated by a foreign state-owned business or a joint venture with a foreign state-owned firm.

As a result of poor performance (see above case study), Railtrack was effectively renationalised in 2002 as Network Rail – a not-for-profit company, wholly dependent upon the UK Treasury for any shortfall in its funds.

TOCs had mixed success. Some performed so poorly that their franchise contracts had to be temporarily taken over by a state-owned operator. For example, in June 2003 the Strategic Rail Authority withdrew the operating licence of the French company Connex South Eastern. The franchise was temporarily taken over by the publicly-owned South Eastern Trains from November 2003 until March 2006 before being returned to a private operator.

Perhaps the most troubled franchise has been the East Coast Main Line between London and Scotland. It was renationalised in 2009, reprivatised in 2015 and renationalised in 2018.

The effect of the coronavirus pandemic

The spread of the coronavirus and the accompanying lockdowns and social distancing saw a plummeting of rail travel. Passenger numbers fell to just 10% of pre-pandemic levels. In March 2020, the UK Government introduced Emergency Measures Agreements (EMAs), which temporarily replaced rail franchise agreements. TOCs were paid a 2% fee (based on pre-Covid costs) to run trains and losses were borne by the government.

When the EMAs ran out on the 20 September, they were replaced by Emergency Recovery Measures Agreements (ERMAs), set to last until no later than April 2022. Under these measures, the fees paid to TOCs were reduced to a maximum of 1.5%. These consist partly of a fixed fee (again based on pre-Covid costs) and partly on a performance payment, depending on punctuality, passenger satisfaction and financial performance. As with the EMAs, the new arrangements involve virtually no risk for the TOCs (except for the size of the performance-related fee). Costs and revenue will be passed to the Department for Transport, which will bear any losses.

TOCs were required to run a virtually full service to allow reduced passenger numbers to observe social distancing. Despite journeys still being only 30% of pre-pandemic levels, social distancing on trains meant that many trains were sold out.

The ERMAs also contain provisions for the replacement of franchises when they come to an end. The precise nature of these will be spelt out in a White Paper, which will respond to the recommendations of the Williams Review of the railways. This review was set up in 2018 in the aftermath of difficulties with various franchises and a chaotic nationwide timetable change. The review’s findings were originally scheduled to be published in Autumn 2019, but were then put back because of the general election and the disruptions caused by the pandemic. The government hopes that it will be published before the end of 2020.

It is expected that the review will recommend replacing the franchise system with something similar to the currents ERMAs. TOCs awarded a contract will be paid a performance-related fee and revenues will go to the government, which will bear the costs. While this is not quite renationalisation, it is not the previous franchise system where TOCs bore the risks. It is in effect a contract system where private companies are paid to deliver a public service.

The CrossCountry franchise

The first test of this new approach to contracting with TOCs came this month. Arriva’s franchise for running CrossCountry trains ran out and was replaced by a three-year contract to run the services, which span much of the length of Great Britain from Aberdeen to Penzance via Edinburgh, Glasgow, Newcastle, Sheffield, Birmingham, Bristol and Plymouth; from Bournemouth to Manchester via Reading, Oxford, Wolverhampton and Stoke; from Cardiff to Nottingham via Gloucester, Birmingham and Derby; and from Birmingham to Stanstead Airport via Leicester and Cambridge.

The contract will last three years. The Department for Transport will gain the revenues and cover the costs and pay Arriva (owned by Deutsche Bahn) a management fee that is ‘performance related’ – as yet unspecified. This, like the EMAs and then the ERMAs, will remove the risks from Arriva.

Nationalisation in Wales

The Welsh government has announced that Transport for Wales will be taken over by a publicly owned company in February 2021. TfW operates many of the routes in Wales and the borders and most of the branch lines in Wales, including the valley commuter lines into Cardiff. It is currently owned by KeolisAmey (a joint company owned 70% by the French company, Keolis (part of SNCF), and 30% by the UK company, Amey), which took over the franchise in 2018 from Arriva. The Welsh government considered that KeolisAmey would collapse if it did not provide support. Ministers decided that nationalisation would give it greater control than simply subsidising KeolisAmey.

James Price, chief executive of the Welsh Government, stated that this allows it:

to reduce the profit we pay to the private sector massively over time, and make sure that when the revenue comes back, it comes back in to the taxpayer.

Under emergency measures, KeolisAmey has already been supported by the Welsh government to the tune of £105 million (£40 million in March and £65 million in June) to continue operating the franchise. Passenger numbers fell by 95% as the pandemic hit.

Is nationalisation a better way forward, or should private train operating companies continue with the government taking on the risks, or should the franchise system be amended with greater support from the government but with the TOCs still bearing risk? The articles below consider these issues.

Articles

Questions

  1. Explain how the franchising system worked (prior to March 2020).
  2. To what extent could each franchise be described as a ‘contestable monopoly’?
  3. What incentives were built into the franchising system to deliver improvements in service for passengers?
  4. What were the weaknesses of the franchising system?
  5. In the context of post-pandemic rail services, compare the relative merits of nationalisation with those of awarding contracts where the government receives the revenues and bears the costs and pays train operating companies a fee for operating the services where the size of the fee is performance related.
  6. What are the arguments for subsidising rail transport? What should determine the size of the subsidy?
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Should Britain’s railways be renationalised?

The linked articles below look at the state of the railways in Britain and whether renationalisation would be the best way of securing more investment, better services and lower fares.

Rail travel and rail freight involve significant positive externalities, as people and goods transported by rail reduce road congestion, accidents and traffic pollution. In a purely private rail system with no government support, these externalities would not be taken into account and there would be a socially sub-optimal use of the railways. If all government support for the railways were withdrawn, this would almost certainly result in rail closures, as was the case in the 1960s, following the publication of the Beeching Report in 1963.

Also the returns on rail investment are generally long term. Such investment may not, therefore, be attractive to private rail operators seeking shorter-term returns.

These are strong arguments for government intervention to support the railways. But there is considerable disagreement over the best means of doing so.

One option is full nationalisation. This would include both the infrastructure (track, signalling, stations, bridges, tunnels and marshalling yards) and the trains (the trains themselves – both passenger and freight – and their operation).

At present, the infrastructure (except for most stations) is owned, operated, developed and maintained by Network Rail, which is a non-departmental public company (NDPB) or ‘Quango’ (Quasi-autonomous non-governmental organisation, such as NHS trusts, the Forestry Commission or the Office for Students. It has no shareholders and reinvests its profits in the rail infrastructure. Like other NDPBs, it has an arm’s-length relationship with the government. Network Rail is answerable to the government via the Department for Transport. This part of the system, therefore, is nationalised – if the term ‘nationalised organisations’ includes NDPBs and not just full public corporations such as the BBC, the Bank of England and Post Office Ltd.

Train operating companies, however, except in Northern Ireland, are privately owned under a franchise system, with each franchise covering specific routes. Each of the 17 passenger franchises is awarded under a competitive tendering system for a specific period of time, typically seven years, but with some for longer. Some companies operate more than one franchise.

Companies awarded a profitable franchise are required to pay the government for operating it. Companies awarded a loss-making franchise are given subsidies by the government to operate it. In awarding franchises, the government looks at the level of payments the bidders are offering or the subsidies they are requiring.

But this system has come in for increasing criticism, with rising real fares, overcrowding on many trains and poor service quality. The Labour Party is committed to taking franchises into public ownership as they come up for renewal. Indeed, there is considerable public support for nationalising the train operating companies.

The main issue is which system would best address the issues of externalities, efficiency, quality of service, fares and investment. Ultimately it depends on the will of the government. Under either system the government plays a major part in determining the level of financial support, operating criteria and the level of investment. For this reason, many argue that the system of ownership is less important than the level and type of support given by the government and how it requires the railways to be run.

Articles

The case for re-nationalising Britain’s railways The Conversation, Nicole Badstuber (27/8/15)
Lessons from the Beeching cuts in reviving Britain’s railwa The Conversataion, Andrew Edwards (7/12/17)
Britain’s railways were nationalised 70 years ago – let’s not do it again The Conversation, Jonathan Cowie (1/1/18)
FactCheck Q&A: Should we nationalise the railways? Channel 4 News, Martin Williiams (18/5/17)
Britain’s railways need careful expansion, not nationalisation Financial Times, Julian Glover (5/1/18)
Right or wrong, Labour is offering a solution to the legitimacy crisis of our privatised railways Independent. Ben Chu (2/1/18)
Whether or not nationalisation is the answer, there are serious questions about the health of Britain’s railways Independent. Editorial (2/1/18)
Why Nationalising The Railways Is The Biggest Misdirect In Politics Huffington Post, Chris Whiting (5/1/18)

Questions

  1. What categories of market failure would exist in a purely private rail system with no government intervention?
  2. What types of savings could be made by nationalising train operating companies?
  3. The franchise system is one of contestable monopolies. In what ways are they contestable and what benefits does the system bring? Are there any costs from the contestable nature of the system?
  4. Is it feasible to have franchises that allow more than one train operator to run on most routes, thereby providing some degree of continuing competition?
  5. How are rail fares determined in Britain?
  6. Would nationalising the train operating companies be costly to the taxpayer? Explain.
  7. What determines the optimal length of a franchise under the current system?
  8. What role does leasing play in investment in rolling stock?
  9. What are the arguments for and against the government’s decision in November 2017 to allow the Virgin/Stagecoach partnership to pull out of the East Coast franchise three years early because it found the agreed payments to the government too onerous?
  10. Could the current system be amended in any way to meet the criticisms that it does not adequately take into account the positive externalities of rail transport and the need for substantial investment, while also encouraging excessive risk taking by bidding companies at the tendering stage?
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A cap on rail fares

Over the past few decades, numerous areas within the British economy have been partly or fully privatized and one such case is British Rail. Why is this relevant now? We’re once again looking at the potential increase in rail fares across the country and the impact this will have on commuters and households. So, have the promises of privatisation – namely lower fares – actually materialised?

Comparing the increase in rail fares with that of the RPI makes for interesting reading. Data obtained back in January 2013 shows that since 1995, when the last set of British Rail fares were published, the RPI has been 66%, according to data from Barry Doe and this compares unfavourably with the increase in a single ticket from London to Manchester which had increased by over 200%. However, it compares favourably with a season ticket, which had only increased by 65%. In the last couple of years, increased in rail fares have been capped by the government to increase by no more than the rate of inflation. As such, customers are likely to be somewhat insulated from the increases that were expected, which could have ranged between 3 and 5%.

This announcement has been met with mixed reviews, with many in support of such caps and the benefit this will bring to working households, including Passenger Focus, the rail customer watchdog. Its Passenger Director, David Sidebottom said:

The capping of rail fare rises by inflation will be welcome news to passengers in England, especially those who rely on the train for work, as will the ban on train companies increasing some fares by more than the average. It is something we have been pushing for, for several years now and we are pleased that the Government has recognised the need to act to relieve the burden on passengers.

However, others have criticised the increases in rail fares, given the cost of living crisis and the potential 9% pay rise for MPs. The acting General Secretary of the RMT transport union commented:

The announcement from George Osborne does not stack up to a freeze for millions of people whose incomes are stagnant due to years of austerity. To try and dress this up as benefiting working people is pure fraud on the part of the Government … Tomorrow, RMT will be out at stations across the north where some off-peak fares will double overnight.

Commuters in different parts of the country do face different prices and with some changes in peak travel times in the Northern part of the country, it is expected that some customers will see significant hikes in prices. Peak travel prices being higher is no surprise and there are justifiable reasons for this, but would such changes in peak times in the North have occurred had we still been under British Rail? Privatisation should bring more competition, lower prices and government revenue at the point of sale. Perhaps you might want to look in more detail at the actual to see whether or not you think the benefits of privatisation have actually emerged. The following articles consider the latest announcement regarding rail fares.

Rail fares to increase by 2.5% in January after Osborne caps price rises at no more than inflation Mail Online, Tom McTague (7/9/14)
Have train fares gone up or down since British Rail? BBC News, Tom Castella (22/1/13)
Rail fares to match inflation rate for another 12 months The Guardian (7/9/14)
Britain caps rail fares at inflation Reuters (7/9/14)
Regulated rail fares to increase by 3.5% in 2015 BBC News (19/8/14)
Northern commuters face big rise in fares for evening travel The Guardian, Gwyn Topham (7/9/14)
Commuter rail fares frozen again, says George Osborne BBC News (7/8/14)
Rail fares, the third payroll tax Financial Times, Jonathan Eley (22/8/14)

Questions

  1. What are the general advantages and disadvantages of privatisation, whether it is of British Rail or British Gas?
  2. Why is it that season tickets have increased by less than the RPI, but single tickets have increased by more?
  3. What are the conditions needed to allow train companies to charge a higher price at peak travel times?
  4. Are higher prices at peak times an example of price discrimination? Explain why or why not.
  5. In the Financial Times article, it is suggested that rail fares are like a payroll tax. What is a payroll tax and why are rail fares related to this? Does it suggest that the current method of setting rail fares is equitable?
  6. Based on the arguments contained in the articles, do you think the cap on rail fares is sufficient?
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Postman Pat

Calls for an independent Scotland have focused on a variety of economic issues. These have included taxation, government spending, currency, fiscal policy and monetary policy. However, the BBC News article below looks at another factor which may be affected by a ‘yes’ vote – the price of stamps.

Having just returned from 10 days in the Highlands, I certainly agree with the BBC article that it would be an expensive business to deliver to the remotest parts of Scotland and would definitely require ‘trains, planes, ferries, Land Rovers and vans’ and, in an extreme case, a fishing boat.

So is the price we pay for postage to less rural areas of the UK used to subsidise the higher costs of delivery to the remotest parts of Scotland and, in particular, to the small islands off the Scottish coastline? What would a ‘yes’ vote mean for the cost of stamps in Scotland and in the remainder of the UK? The following articles consider this rather odd question.

Why postage should be cheaper in UK if Scots vote ‘Yes’ BBC News, Brian Milligan (19/4/14)
Tories warn over post service costs The Courier (6/4/14)

Questions

  1. What happened when the Royal Mail was privatised?
  2. What are the benefits and costs of privatisation?
  3. Using a cost and revenue diagram, explain how the different costs of delivery between urban parts of the UK and the remotest parts of Scotland should be reflected in different prices of postage.
  4. If the price of postage is the same for delivery everywhere in the UK, use your diagram to explain how this happens.
  5. What does your diagram suggest will happen to the price of postage stamps if a ‘subsidy’ is no longer available?