Would renationalisation improve Britain’s railways?

Britain’s railway network and its weather have two things in common: both are highly variable in quality, and both provide Britons with ample opportunities to make small talk in observing how one or the other has ruined their day. Yet while the weather represents a nuisance to residents of this country, few things seem to ignite as much misery and exasperation as the state of the country’s railways. Aside from trains frequently running late, the main gripe concerns fares, which have become increasingly dear: the ONS estimates average train ticket prices have increased by 121% since 1995, and long distance fares have risen by over 150% – almost double the rate of inflation. As well as becoming more expensive, train journeys are also becoming more uncomfortable: 22% of commuters travelling to London and 16% of those travelling to Manchester are forced to stand.

While there is nothing we can do about the weather (although global warming may one day bring us a lovely Mediterranean climate), there is, we are told, an obvious solution to the sorry state that Britain’s railways find themselves in: renationalisation. It is one of the flagship policies of the Labour Party’s manifesto, and one of their most popular – a ComRes survey commissioned by The Mirror found 52% of respondents in favour of reasserting public ownership over the railways. But would state ownership really improve the situation? To answer this question, we must ask what has gone wrong and how we got here in the first place.

Average train ticket prices have increased by 121% since 1995, and long distance fares have risen by over 150%

Since privatisation, train travel in Britain has seen a renaissance: rail journeys have risen by 70% since 1995. Yet while the distance travelled has increased, the amount of track has remained the same. Ah, you say, so that’s why fares have risen so much – it’s a simple matter of supply and demand! Well, sort of, but it’s not quite that simple; there is also a fair amount of price discrimination going on. Simply put, commuters, who want to travel on busy trains at peak times pay through the nose, while travellers taking the same journey at an off-peak time with a pre-booked ticket will pay substantially less. When comparing long-distance and regional train fares, Transport Focus, an independent transport user watchdog, finds that the UK is largely on par with other high-income countries; the key difference is expensive peak-time fares bought on the day. In other words, the British system is better at yield management – expensive tickets are sold on busy trains and cheap ones are sold on empty trains.

The system could certainly be more efficient. When the railways were privatised in the 1990s, tracks were kept separate from trains. The aim was to boost competition by allowing multiple private train operators to use the same stretches of tracks. But in some instances this has reduced efficiency, with employees of train operators doubling up with staff from Network Rail, the state-owned track operator. But that is a problem of allocating and coordinating resources, rather than of ownership. There is little reason to think that renationalisation would solve the issue. Until the strike-prone railway unions are tackled, inefficiencies like overemployment will remain. This point is illustrated by the recent industrial action by Southern Railway staff who were protesting the introduction of driver-only trains over safety concerns, despite the independent Rail Safety and Standards Board declaring them to be perfectly safe for travel. Therefore, it seems, no matter who owns Britain’s train operating companies, ticket price-reducing efficiency improvements will be hard fought and take time.

The British system is better at yield management – expensive tickets are sold on busy trains and cheap ones are sold on empty trains

One of the key arguments made in favour of renationalisation is that privately-owned train operators are simultaneously ripping off both commuters, through extortionate ticket prices, and the taxpayer, through government subsidies, resulting in fat profits for shareholders. While it’s certainly not untrue that fares have increased in price, or that train operators receive large subsidies, it is patently false to say that train companies reap vast profits. According to figures provided by the Office of Rail and Road for the 2015-16 financial year, passengers paid £9.2 billion in fares and the government paid £2.4 billion in subsidies. Combined with other income, the total revenues earned by franchised rail operators was £12.4 billion. How much of that went to the train operators as profits? £285 million, or about 2.3%. Hardly a gravy train. By comparison Apple makes a revenue margin of about 40%.

So if we renationalised the railways tomorrow, keeping the subsidy the same but returned the profits to passengers in the form of cheaper tickets, it would lead to a one-time price cut of just two percent. Once we factor in the costs of reorganising and restructuring the entire railway operation—a mammoth task by anyone’s standards—it’s unlikely that there would be any meaningful cost savings.

However, even in the event of a surprise Labour victory on June 8th, it is unlikely that the railways would be renationalised straight away. Most railway franchises do not expire until the 2020’s, and in the meantime, railway operators would have no incentive to continue investment since they would have no chance of renewing their contract.

It’s important in this debate to remember the rather monotonous but highly appropriate aphorism that there is no such thing as a free lunch. Even if renationalisation brought ticket prices down, somebody would need to pay for it. European countries fund cheaper railway tickets through vast subsidies. Is it fair to ask taxpayers, even those who drive to work and rarely use trains, to fund the daily commutes of others?

Furthermore, there is little evidence that the quality of service has declined. A recent study by Richard Wellings of the Institute of Economic Affairs, a think-tank, finds that punctuality has remained roughly at the same level as under British Rail, and that there has been little increase in overcrowding over the past fifteen years. Moreover, safety standards have markedly improved under private ownership. It seems that much of the complaints over poor service in the privatised rail industry are misplaced.

Even if renationalisation brought ticket prices down, somebody would need to pay for it

Sure, Britain’s railways have many problems, but these are problems of underinvestment. For example, due to poor communication and planning procedures, Britain’s railway network is 40% less efficient than its European counterparts. The lack of coordination between private train operators and the public track operator also presents problems. Because they don’t own the track, train companies have little incentive to invest in carriages that minimise damage to rails.

More fundamentally, the system is a victim of its hybrid public-private ownership model, with only the train operating companies being fully privatised. The combination of heavy regulation and dependence on state subsidies has ensured that many of the benefits of privatisation simply have not materialised. Instead, a plethora of special interests has proliferated, which are more concerned with gaining financial support and regulatory favours from government than improving the quality and efficiency service. Perhaps the problem is not too much privatisation, but too little.

The next government should seek to enact further reforms aimed at weaning the industry off state support and allow its structure to become more cost effective by allowing mergers and demergers. A liberalised railway would exhibit far more vertical integration—and therefore enjoy greater efficiency—than the current model. Railway operators should be free to cut costs by closing loss-making lines, and to introduce measures such as “super-peak” fares to ease overcrowding, whilst catering to budget consumers by offering cheap standing-only carriages.

Looking back with nostalgia to a bygone era is not the right approach to government. Rather than seeking to reinstate a nationalised model which has already proved to be unsuccessful, the political class should look for innovative solutions that are suitable for the 21st century.