20130113-155734.jpg It’s the New Year in Britain, and as is now traditional, it has started with news stories about rail commuters complaining about increases in the price of travel. The news coverage has ranged from the simple to the simplistic.

It’s worth unravelling some of this. In terms of the rail sector, the clearest summary is from Christian Wolmar.

Finding the right target for passenger anger is made difficult by the fact that transparency is not a feature of the rail industry and railway economics remains a dark art. … The railways may have been privatised in the mid-Nineties, but in reality they are a mix of private and state interests, with most of the purse – and other – strings still being pulled by the Government. Forget the notion of a raw capitalistic enterprise with energetic entrepreneurs seeking innovative ways to fleece the public: the train operating companies are pretend capitalists who have very little room for manoeuvre and invest very little.

As a result of the privatisation of the rail industry – a legacy of the the John Major government, even if some Conservatives seem forgetful of this – there are effectively four main actors: the government, in the shape of the Department of Transport; the train operation companies, or TOCs, who run the trains and most of the stations; Network Rail, responsible for infrastructure; and the Office of the Rail Regulator, which polices the myriad and complex contracts generated by the system.

Network Rail, initially privatised as Railtrack in the original legislation, was taken back into public ownership after Railtrack proved to be better at generating profits than ensuring track and passenger safety.

In short, then, it’s a complex system imposed on top of a complex industry.

Gaming the system

And despite the rhetoric of ‘privatisation’, this is a tightly regulated market. Effectively the train operating companies bid for time-limited monopolies on particular routes; the winner is the one which produces the highest plausible bid – and therefore the highest realistic return to the Treasury – in exchange for the monopoly. In other words, the most likely winner is the company that games the system and over-bids by a bit.

Some fares are regulated, including season tickets and off-peak; initially they were set at RPI-1%, later at RPI+1%. Some are not, including peak fares. Economic growth assumptions for the bids are taken from the Treasury’s economic forecast, even when all involved know that these are polite fictions. The TOCs also have a set of social obligations that they are required to deliver; in exchange, though they also get subsidies under a complex risk-sharing arrangement when their revenue forecasts don’t match revenues.

Slow, complicated and expensive

The dirty secret of the franchising system is that the only way to pay for the social obligations (which involve running quite a lot of fairly empty trains) is to cram in your peak-time passengers to the point of overload, at least on commuter lines. The other is that unless you change journey times (which essentially means changing working patterns) increasing capacity is a slow, complicated and expensive business to remove system pinchpoints, as seen from the huge construction projects at Reading, Birmingham and London Bridge. (Crossrail is a different story: that’s just another piece of fawning towards the City).

When it was privatised, the rail system was in long-term decline, largely the result of years of underinvestment and ideological hostility to nationalised industries in general and public transport in particular. It’s said, though I can’t find the evidence, that one of the motives for privatisation was to get the costs of this declining industry off the Treasury’s books.

Short term monopolies

It didn’t work out like that. It turns out that if, in effect, you sell a short-term monopoly to a private sector company under which they only turn a profit if they put bums on seats, then they put bums on seats. (Who knew?) The result is that the British rail network is now carrying as many passengers as it did in the late 1940s (so running post-war record levels) while the size of subsidies to the industry has climbed five-fold since privatisation even while rail company executives are richly rewarded. At one level, rail privatisation is a string of unintended consequences.

So, when the discussion about rail fare increases gets directed into a discussion about the proportion of investment that should be borne by passengers, and the proportion by government (or “taxpayers”, as Conservative ministers always call them) it’s being looked at through this narrow business frame.

Through this narrow frame, it’s possible to make a case that passengers should pay a larger share. After all, train passengers, especially commuter passengers, tend to be better off, so a subsidy to train services is a subsidy to the wealthier.

At the same time, it’s striking that other societies draw this line in sharply different places. The distance you can travel for a given amount indicates, mostly, how much passengers pay. As the Daily Mail reported,

“Based on rush-hour prices for those who do not pre-book, a British traveller can go an average of 133 miles for £100, against 188 miles in Norway for the same money, 312 in Spain and Germany, 365 in Wales and Scotland, 558 in France and 736 in Italy.”

Car and train subsidies

But there are two big problems with looking at it like this. The first is that treats rail as a bubble that is disconnected from the rest of the transport system. And the most recent data on car subsidies, from the respected Dresden Technical University, suggests that in the UK expenditure by government on car use runs to £48 billion a year, and that – if you assume that car-related taxes should be tallied against this – there’s still a gap of £10 billion. And this gap is understated. It doesn’t include the costs of congestion or ill-health from lack of exercise or damage to community cohesion of traffic.

As the report notes:

“Car traffic in the EU is highly subsidised by other people and other regions and will be by future generations: residents along an arterial road, taxpayers, elderly people who do not own cars, neighbouring countries, and children, grandchildren and all future generations subsidise today’s traffic.”

Hand-outs to the better off

Far from there being a “war on motorists”, as the Daily Mail and some ministers claim, actually there’s a large handout, and this – as with rail – is a handout to the better-off, who are rather more likely to drive than the less well-off. There is a close correlation between social grade, income, car use and mileage. Mobility is a prerogative of affluence. And, of course, the worst side-effects of motor transport – such as noise, pollution and community fragmentation – tends to fall on poorer communities where people drive far less. And though we have known this for years, policy-makers, who are generally affluent themselves, have ignored it.

But unlike trains, the government has repeatedly changed the rules on the tax escalator on fuel duty to cushion increases in the cost of driving. The effect is that the relative cost of driving has declined compared to the cost of travelling by rail. Research by the left-leaning think-tank, the IPPR, found that car costs have increased by 33% between 1997 and 2010, below the rate of inflation, while train costs had risen by 66%, and bus costs by 76%, comfortably above it.


(Source: IPPR)

Short-termism and markets

The second is that the focus on present day passengers means that there is insufficient focus on the inter-generational costs of today’s decisions. Just space for one example of this here: eight-year rail franchises are too short to encourage bidders to build in sustainable investment decisions, but the 15-year bids which the government tried to introduce to enable this are too complex and uncertain to calculate as financial models.

Of course, one of the reasons why businesses or sectors are run by the public sector is because many of the costs and benefits of the industry fall outside of the market that it defines. The roads sector has always been vastly subsidised by the state, despite its large external costs. In contrast, the privatisation of public transport has created all sorts of system costs: for example, public transport in Britain remains unintegrated and therefore inconvenient because (outside of London) public authorities can not direct local privatised bus companies to connect services together.

A different operating model

And of course the whole franchise mechanism loads cost and complexity onto the system – one of the reasons for the West Coast bid fiasco. The whole system generated £695 for the government through profit sharing last year. And even though a report commissioned from a rail boss found the franchise system had “made a major contribution“, if needing improvements (really).

Christian Wolmar observes that a concessions model could produce as much, or more, revenue while creating other benefits. This is how TfL runs the London Overground and also how the East Coast line is managed. The concessions model gets the benefit of marketing, but allows both risk and long-term investment to be better managed, and also reduces the transaction costs of the current model. In other words, it’s a genuine public-private partnership, rather than one designed to funnel public funds to the private sector.

As Kingsley Dennis wrote (opens pdf), the future of mobility is about “more than the car”. It serves the interests of ministers to treat different transport modes as if they’re different, unconnected systems, and the rail system as if we’re locked into the present unwieldy franchise system. But it doesn’t serve our interests when journalists let them get away with it.

The photograph at the top of this blog is taken from a post by the TSSA, and is used with thanks.