Renationalisation – not the panacea it may seem
26 September 2016 | Author: Jim Steer, Director, Steer Davies Gleave

Rail has been getting a bad press through the summer. The dispute over conductors' duties on Southern was compounded by the ritual summer angst over next year's fare levels, triggered by the July RPI increase of 1.9%.

Quite why this should lead to fresh calls for rail renationalisation might be more a matter of sentiment than reason. But, as with Brexit, it's one thing to say you want to end the current arrangement, quite another to describe the new one – and even harder to describe how to get there.

The current allocation of rail between the public and private sectors has its own mini-history. Infrastructure started out in 1993 as a regulated near- monopoly in the public sector that was then privatised – Railtrack. With the withdrawal of Government funding, it collapsed in 2001. It was converted into a "third way" company in 2002, no longer listed, but able to raise its own funding – Network Rail.

But changes in Eurostat accounting rules in September 2014 meant the Government could no longer treat Network Rail as if it were in the private sector. Its debts would henceforward appear on the public books, adding about 2% to public sector net debt. Over the two years since, ministers and the DfT have been able to exercise greater control over Network Rail.

So Network Rail was nationalised two years ago and few people noticed. They might in the years ahead if the Government tightens its funding. Fortunately, Network Rail still has five-year budget-setting cycles, rather than the Treasury's annual budget constraint that bedevilled BR. But independent regulation has been weakened, with ORR giving up its role in monitoring Network Rail's improvement expenditure.

Rolling stock remains privately-owned through the Rosco structure established in 1994 (freight companies aside), and the private sector supply chain is of course heavily involved through all stages of the many infrastructure improvement activities. But Network Rail brought track maintenance back in house in 2004 – again with little interest from the wider media.

What we have today is a private-public sector model. The trains are privately owned and leased by privately owned (or foreign state-owned) train operating companies on infrastructure managed and funded in the public sector that tenders major construction projects to the private sector.

For now, any clamour for "nationalisation" usually refers to the franchised train operating companies, even though they are just one of several private sector components in today's railway. The franchises are already tightly specified by the public sector, and all franchises are time-limited and subject to a huge set of obligations, including on fare levels. Some face competition from open access operators threatening revenue flows committed to in franchise agreements. This is real risk transfer, but with strings attached.

Franchises yield about 3% of their turnover as profit. Not a great potential reward for nationalisation, but proponents argue that much higher cost savings could be achieved. Is this realistic?

Well, there were extra costs from the 1990s privatisation programme
– my own work at thetime suggested these would arise mainly from additional transaction costs and the ending of BR's self-funded insurance scheme, as well as from profit margins.

The problem is that (i) many transaction costs with third parties would remain and (ii) even if a new BR-style monolith (as privatisers used to like calling it) were to be created around Network Rail, the work and costs involved in managing operational, technical and financial interfaces would be likely to survive in the form of an enlarged bureaucracy.

Ending franchises is unlikely to transform rail economics or to reduce fare levels. It would be better to think about the strengths and weaknesses in the current arrangement and how the weaknesses can be put right. Number one weakness is the fare system – a BR inheritance made more complex with the advent of yield management systems.

But there are also areas of tremendous strength, including market growth. Another is the safety record, which is surely not to be jeopardised. Strangely, the separation of responsibilities for train and track may have focused on this crucial interface in a way that has increased rail's safety rather than (as many suggested it would) worsened it. So those who believe that EU legislation drove Britain away from a vertically integrated railway should realise that leaving the EU does not make vertical reintegration necessarily a good idea.

In the past, successive governments were reluctant to back investment in a nationalised rail industry. How very different from today. Of course a publicly- owned rail system could be tried again, but a new approach to management would be needed.

And it would be truly ironic if the Government were to give up on rail franchising at the same time as it introduces franchising for bus services through the Buses Bill.

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