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
- What are the general advantages and disadvantages of privatisation, whether it is of British Rail or British Gas?
- Why is it that season tickets have increased by less than the RPI, but single tickets have increased by more?
- What are the conditions needed to allow train companies to charge a higher price at peak travel times?
- Are higher prices at peak times an example of price discrimination? Explain why or why not.
- 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?
- Based on the arguments contained in the articles, do you think the cap on rail fares is sufficient?
In 2009, interest rates in the UK were cut to a record low of 0.5%. Since that point, there has been almost unanimous agreement amongst the members of the Monetary Policy Committee to keep rates at this low. It is only in the last couple of months when some have even voted to raise rates. However, this month, interest rates were once again held at 0.5%.
The low interest rates have played a key part in creating an economic stimulus for the UK economy. With low interest rates, some of the key components of aggregate demand are stimulated and this in turn is crucial in creating a growth environment. However, with the recovery of the UK economy, there are now expectations that interest rates may soon begin to rise. Perhaps adding to this expectation is the fact that the bank’s stimulus programme has remained unchanged at £375bn. As more data is released that continues to show the positive progress of the UK economy, it becomes increasingly likely that interest rates will soon rise.
Despite the fact that interest rates will inevitably increase, Mark Carney has said that any increase will be slow and gradual to minimise the effect on consumers, especially home-owners. Mortgage payments are typically the biggest expenditure for a household and so any increase in interest rates will certainly put added pressure on home-owners and with wage growth still remaining slow, there are concerns of the impact this may have. Perhaps this may continue to deter some of the Committee for voting in favour of interest rate rises. There does appear to be some conflict between economists as to what the next step is likely to be. Yael Selfin is the economics director at KPMG and said:
With inflationary pressures still subdued, it is no surprise that rates have been held … Despite recent revisions to GDP and productivity, there is still room for further improvements in productivity, to mop up some of the rise in demand over the coming months. Steady falls in unemployment and strong economic growth are likely to see rates rising in February next year.
However, Andrew Goodwin, who is the senior economic adviser to the EY ITEM Club commented that:
On one hand, the stronger performance might convince some members that the economy is sufficiently robust to withstand the steady tightening of policy, although it should be noted that the Bank routinely builds into its forecasts the expectation of some upward revisions to the recent historical data … On the flip side, the revisions also provide some ammunition for those of a dovish persuasion, with evidence that a stronger productivity performance has had little feed through into inflationary pressures.
The key question therefore appears to be not whether interest rates will increase, but when. The MPC certainly considers inflation when making its decisions, but over the past few years, it is economic growth which has probably been the biggest influence. The data for the UK economy over the coming months, as well as the fast-approaching General Election, will prove crucial in determining exactly when interest rates increase. The following articles consider this monetary policy change.
UK interest rates held at record low of 0.5% BBC News (4/9/14)
Bank of England holds interest rates at 0.5pc for 66th month The Telegraph, Szu Ping Chan (4/9/14)
Timing of UK interest rate hike mired in UK services sector conundrum International Business Times, Lianna Brinded (3/9/14)
Interest rates expected to hold Mail Online, Press Association (31/8/14)
Bank of England holds rates despite robust recovery Reuters, Andy Bruce (4/9/14)
Bank of England keeps record-low rate on weak inflation Bloomberg, Scott Hamilton (4/9/14)
Questions
- By outlining the key components of aggregate demand, explain the mechanisms by which interest rates will affect each component.
- How can inflation rates be affected by interest rates?
- Why is there a debate between economists and the MPC as to when interest rates should be increased?
- If interest rates do increase, how is this likely to affect home-owners?
- What are the advantages and disadvantages of a slow and gradual rise as opposed to one big rise?
With the new Premier League football season only a week away, TV companies are heavily advertising the matches they will be showing. Until recently, BSkyB, having seen off competition from Setanta and ESPN, appeared to have an untouchable position in this market. However, competition now appears to be intensifying.
BT entered the market in 2012 by paying £738m for the rights to screen 38 Premier League matches a season for 3 seasons, with Sky showing another 116 matches. BT is clearly heavily backing its sports coverage with an initial outlay of £1.5b and them continuing to sign up high profile presenters and ambassadors including former players and a current manager.
Furthermore, BT dealt Sky (and ITV) a hefty blow last year when it outbid them to win the rights to exclusively show European club competition matches from 2015. Sky responded by saying that:
We bid with a clear view of what the rights are worth to us. It seems BT chose to pay far in excess of our valuation
If true, this would illustrate the winner’s curse which can arise in auctions. However, John Petter, chief executive of BT Retail, said that the deal demonstrated that BT Sport was committed to establishing itself in this market and countered Sky’s suggestion that they had overpaid by saying:
They would say that, wouldn’t they? Secretly, I’d expect them to be kicking themselves and full of regrets this morning
Clearly important to BT’s strategy is bundling its sports coverage in for free with their broadband packages. This is not without controversy since, at the same time as spending vast amounts of money to setup its sports coverage, BT is receiving large government subsidies to improve rural broadband provision.
An important forthcoming ruling from the Competition Appeal Tribunal will have a significant effect on how competition between BT and Sky develops. In this case Sky is accused of abusing its dominant position by refusing to supply BT’s YouView service with its sports channels at a reasonable wholesale price and could now be forced to do so.
It will also be fascinating to see how BT Sport’s strategy develops over time. BT is unlikely to continue 
to provide all its coverage for free once it includes the European matches that it has won the rights to show at great expense. It will also be fascinating to see the extent to which it continues to have success in winning broadcasting rights in the future.
Competition will inevitably push up the amount that the Premier League raises in the next rights auction. Current predictions are that these will be sold for over £4bn, up from £3bn in the previous auction. This will increase the amount the Premier League clubs receive and is also likely to further push up player wages. It remains to be seen the extent to which this will benefit viewers, not to mention pubs wishing to show the games some of whom have in the past looked for alternative solutions because of the high prices they have to pay.
BT wins court battle forcing review of Sky wholesale pricing decision The Guardian, Mark Sweney (17/02/14)
BT Sport does little to lift BT TV homes informitv – connected vision (01/08/14)
BT Sport continues to invest in football line-up MediaWeek, Arif Durrani (29/07/14)
Questions
- What are the key characteristics of the market for sports broadcasting rights?
- What are the pros and cons for consumers of BT Sport’s emergence?
- How do you think Sky might respond to competition from BT Sport?
- How do you think BT Sport’s strategy might develop over time?
The Competition and Markets Authority (CMA), launched in October 2013, has been operating since April of this year. It is the successor to the Office of Fair Trading (OFT) and the Competition Commission. One of the current cases under investigation by the CMA is that of suspected criminal cartel activity in the supply of galvanised steel tanks.
On 11 July, Clive Geoffrey Dean, a former director of Kondea, and Nicholas Simon Stringer, a former director of Galglass, appeared before Westminster Magistrates Court. They were charged with dishonestly agreeing with others to divide customers, fix prices and rig bids between 2004 and 2012. The deals were with a number of companies. The charges are under section 188 of the Enterprise Act 2002.
This is the second prosecution in this case. On 17 June 2014, Mr Peter Nigel Snee, Managing Director of Franklin Hodge Industries, pleaded guilty to similar charges.
Under the Act, directors found guilty face custodial sentences of up to 5 years and unlimited fines. The CMA and government are keen to send the message that they will not tolerate cartels and that board members had better beware of colluding with other companies. Indeed, the CMA is committed to pursuing cases of suspected criminal cartels more frequently and more rigorously.
The question is whether this will deter criminal collusion or whether it will simply make companies more careful to keep collusion hidden from the authorities.
Two men face charges in ongoing criminal cartel investigation CMA Press Release (11/7/14)
The First Real Test of Sentencing for the UK Cartel Offence Competition Policy Blog: UEA/ESRC/ccp, Andreas Stephan (24/6/14)
An Important Watershed in the CMA’s Prosecution of the Criminal Cartel Offence Eversheds (18/6/14)
Questions
- What types of restrictive practices constitute ‘cartel agreements’?
- In what ways are cartels against the interests of their customers?
- Are there any ways in which consumers might gain from a cartel?
- What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
- Find out what other cases are being considered by the CMA. Choose one or two and examine how the activities of the firms/people involved might adversely affect consumers or other firms.
- Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?
Every year thousands of entrepreneurs will have another great idea that is sure to take off and bring in millions of customers. However, most of these great ideas will turn into another business failure. But, in the case of Dropbox, it is multiple business failures that eventually created a huge success, giving hope to millions of budding entrepreneurs.
With 300 million users, the file sharing ‘Dropbox’ is certainly a success, estimated at a value of $10bn. But it didn’t happen immediately and was preceded by a few failures. So, what is the secret to success in this case? The co-founder of Dropbox, Drew Houston, said that it is all about providing something that customers want. In the case of Dropbox, customers are crucial: the more people use it, the easier it becomes for others to use it too, as it allows file sharing on a much larger scale. Perhaps here we have a case of network externalities.
With Dropbox people would tell their friends about it and collaborate. So when you go into work and work on a project with colleagues you recruit them in essence to become Dropbox users because you’re all working on a project together.
No doubt there are many other examples of businesses that have proved a success after several failed attempts. Providing customers with what they want, at the time when they need it is clearly a key ingredient, but so, it appears, is business failure. The following article from BBC News considers the rise of Dropbox.
Dropbox and the failures behind it BBC News, Richard Taylor (1/7/14)
Questions
- Customers are clearly crucial for any business to succeed. How can a new entrepreneur find out if there is a demand?
- Why was timing so important in the case of Dropbox?
- Given that customers can actually use Dropbox for free, how does this company make so much money?
- What are network externalities? Explain them in the context of Dropbox.
- Drew Houston says that ‘distribution’ is another key ingredient to success. What do you think is meant by this and how will it help create success?
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?
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:
