Now arriving on platform 1: myths and fallacies about rail 'privatisation'

Complaining about the railways is something of a British obsession. It probably comes second only to the weather in terms of the things we like to gripe about. In many cases our grievances are legitimate: overcrowding, cancellations, delays, high fares, illogical ticket pricing, soggy sandwiches, inaudible announcements, and so the list goes on.

The culprit for these shortcomings, at least if you listen to popular opinion and left leaning newspapers, is privatisation. The argument runs that putting the railways into private control has created a profit first system where companies have scant regard for the needs of passengers, fail to invest, gouge on prices, and create all manner of issues and problems.

As widespread as it is, this explanation is balderdash.

The first and most important question to ask is whether the railway system, as it exists today, is actually a proper private entity in any meaningful sense of the term. In other words: who owns the railway?

One thing here is certain: it isn’t the Train Operating Companies (TOCs). That much should be obvious given that they have to bid for the right to run services. In actuality, it’s the government which holds the title deeds to the railways: it says who can, and who cannot, run services; it tells them what services to run and, very often, how to run them. If the contractors don’t meet the government’s requirements, then their agreement is terminated and their services dispensed with – as the case of the long since defunct GNER neatly testifies. That’s hardly a private system: it’s a publicly, state owned system partly contracted out, on a short term basis, to private companies. Or, in other words: a bungled mess.

So, if the system isn’t properly private in the first place, blaming private enterprise and calling for renationalisation is as futile as it is muddleheaded. But there is also a more important issue at stake: the fact that most people believe the system is private leads them to arrive at sweeping and erroneous conclusions.

The arguments are well worn and familiar. The lack of new rolling stock is caused by corporations trying to save money by squeezing more and more passengers onto already overcrowded trains.  Fare increases are implemented by fat cats in boardrooms wanting to boost their profit figures. And cuts in services are made by greedy private companies seeking to make a fast buck. And so on, and so forth.

A more careful and considered examination of the facts reveals each one of these charges to be erroneous. It shows that the root cause of many of the issues is the overcomplicated system, with its mixture of public and private, which is responsible for the large majority of problems which have occurred since 1995.

Investment

The nature of the franchising system is probably the primary barrier to investment in the rail network. The central issue with franchises is the short time periods for which they are granted: the majority of older franchises were given to Train Operating Companies (TOCs) for periods of 7 to 10 years, with the final years usually being conditional on meeting certain performance criteria. Admittedly this is now changing; but the government has been slow to shift.

Clearly, no company can make significant levels of capital investment over such a period as there is an insufficient window of time in which they can generate a realistic return. The result is that most TOCs can only commit to relatively minor levels of capital expenditure. This stifles investment in the rail network and means that government is still the only real investment vehicle for most major capital projects.

This situation is exacerbated by the long gestation period for many developments and initiatives. For a ten-year franchise, it is not unrealistic that the development of new trains or stations – even were these things to be completely under the purview of Train Operating Companies, which they aren’t – could take up at least half, if not more, of the franchise period. This is an unattractive option which, again, stifles development.

As well as hampering investment, the franchise system also means that the network is run on a short term basis. Franchisees have relatively little concern for what happens after their period of operation is over because there is no guarantee that they will win the next franchise agreement. While this approach is understandable, it means there is virtually no incentive for long term strategic planning and necessary structural adjustments to the rail system are simply overlooked and left untouched.

Look at it this way. If you rent a house on a short to medium term basis, it stands to reason that you’re not going to invest in it very much. You might paint the odd wall to make your surroundings more pleasant but you’re not going to lay acres of new carpet, re-plaster walls or undertake major structural work.

The same type of argument applies to TOCs. If they don’t own a franchise but merely ‘lease’ it from the government they’re not going to inject huge amounts of cash. Sure, they will put in some money here and there – the railway equivalent of painting a wall – but it just doesn’t make sound business sense to do anything over and above this.

To get more private investment in the railways we need to give TOCs more of a reason to invest and to do that we need to give them more of a sense of ownership over their franchises. This may be much longer agreement terms or it may something more permanent; but whatever it is, something clearly needs to be done.

Profit

The profit motive – the idea of making surplus cash out of dealings with customers – is one of the most misunderstood concepts of the corporate world.

The public generally don’t object to companies making a little money, but are quick to pronounce a negative verdict on those they see as making ‘too much’ – although no one has yet come up with a robust definition of exactly how much constitutes ‘too much’. They also readily denounce the profits of those organisations they see as making money out of an inferior product – something that often applies to the railways.

Of course, there is nothing whatsoever wrong with making a profit. Indeed, it is profit that creates funds for future investment, for staff salary increases and for shareholders and investors. And neither is there anything wrong with providing a return for investors. The railways need capital; without it there can be no future development. And that capital will only come if rail companies are able to provide a good return for investors. No profit, no investors, no capital, no development, no new carriages, no new capacity, no new anything.

And then we’re back to precisely the situation we had under British Rail where the railways were constantly starved of cash causing a backlog of investment which still haunts us to this day. Profit is an essential part of the functioning of a market economy and it works in everyone’s interests – rail passengers included.

Even with that principle accepted, the idea that Train Operating Companies are profiteering is little more than a popular lie put about by those with an axe to grind but who have never examined the P&L of a train company.

If they did they’d see that rail is not a particularly profitable industry. For every pound spent on a ticket around 77 pence is spent on operational costs, franchise payments account for around 15 pence, capital investment 3 pence, and operating profits around 5 pence. By corporate standards that’s a fairly meagre rate of return.

So, while the charge that TOCs are profiteering makes for a good headline, it simply isn’t one which stacks up against the available evidence.

Service levels

You can’t please all of the people all of the time! For certain, it’s an old adage but, when it comes to the railways, there is a great deal of truth in it.

Passengers, and the bodies that represent them, are fairly good at making their desires and requirements for better rail services well known. However, even if there is logic and sense to those demands train operating companies are not always in a position to respond favourably. This is mainly because service specifications are not determined by the train operating companies, but by the government which draws up the franchise agreement.

These ridiculously long and complex documents go into great detail about what services should be run, when they should be run, and how companies should run then. Certainly, operating companies do have some discretion to advise and suggest changes: but the room for alterations is small.

So, in essence, you have the government – one of the least customer centric organisations – presiding over and designing timetable and service levels. And, as the government has admitted in the past it does not always design these specifications, or award franchises, on the basis of what passengers want, it does so on what constitutes ‘good value for money’ for taxpayers.

Changing the nature of the franchising and, indeed the whole rail system, to one which gives more control to operating companies is an essential first step in making the railways more responsive to consumer needs. However, it’s not a panacea: consumers have to be realistic.

No company is going to run hundreds of services on a line where passenger traffic is scarce. No company is going to order hundreds more carriages so there is absolutely no overcrowding in the peak when those same carriages are redundant for the rest of the day. No company is going to build a new line to serve a small hamlet of 17 people. These things are simply not commercially feasible and consumers should expect them no more than they reasonably expect Tesco to open a store on every single street in Britain because it is handy for them to have a supermarket right on their doorstep.

Somewhere along the line, many people got the misguided idea that the railway exists to provide every single customer with the exact service he or she wants – or, more commonly put, to serve the ‘public interest’. It is a dangerous belief. No private company could deliver such a promise, and if no private company could run such a service that only leaves the government. The truth is, however, that the government can’t deliver such a service either and, in attempting to do so, distorts supply further away from demand than any private company would do.

The bottom line is that private companies are much better at delivering on consumers’ needs. They are more innovative than government and far more entrepreneurial at finding solutions to complex problems of meeting demand. But, no matter how good, even they can’t please all of the people all of the time. That is not a failure of the free market; it is a fundamental and critical feature of the free market.

The final analysis

The pattern, when you look at it objectively, is clear. At the bottom of most of the problems with the railway is the government, not private companies. Calling for yet more government involvement through ‘renationalisation’ is simply prescribing more of the same poison which is damaging the system in the first place. It will result in an even greater array of problems and a further deterioration in service quality.

Private companies don’t, of course, always get it right but they are, in general, far more efficient at running things than the government; and this is as true in rail as it is elsewhere. But in order for them to be effective they require a degree of operational freedom which just isn’t present on today’s rail network.