Evaluate the case for Nationalising UK Railways

 

Nationalisation means the process whereby a business is taken into government ownership and is run by a public authority. Between 1945 and 1985, many British companies were nationalised ones. Governments, starting consistently in the 1980s, sold these companies to the private sector with the aim of changing companies which required public funding into ones that generated tax revenue. In addition, attempts were made to create or emulate markets in the areas where the firms operated, often by breaking the firms up into a number of new ones, so as to introduce choice for customers, competition, and dynamic efficiency. A trade-off was accepted in which formerly public companies made private profits, often accompanied by subsidy, for shareholders, but where shareholders invested in infrastructure and capital. This was accompanied by government regulation of price and services.

It was the case, however, that many industries were originally natural monopolies. This is a situation in which a barrier to entry exists to a market in terms of the sheer scale of creating a network, or grid, or service. This means that there are very high average and marginal costs initially, and therefore that only one firm can produce the good effectively. Once that firm does begin to operate, however, marginal and average costs fall very significantly and keep falling at any conceivable level of output.

This is because of economies of scale, and because the good that they are providing is often one which is effectively non-rival because of physical constraints on competition. Economies of scale exist where, because of its size, a firm can hold down costs to their lowest long-run average point (the minimum efficient scale) across a range of output. This is an advantage over smaller firms.

 If a firm controlled a gas or water network, for instance, it would make no sense for another firm to build an exactly similar network; nor would households or firms want to have plugs or taps from the different firms in the same building. With the network, the marginal cost for an existing firm to connect a new building to the grid would be far lower than the costs for a start-up firm of doing so.

When the railways were privatised, a complex model was created to emulate a market. The railtrack, signals, stations, and ticketing coordination were given to one firm. The train and freight operating companies were encouraged to compete for franchises which were time-limited and to bring in their own trains, though all were held to minimum standards of service and safety. The maintenance of track was initially a matter for competition between providers, controlled through the track company. Franchised firms paid the track company and sat on a board to coordinate safety issues.

The system was complex, confusing, open to huge amounts of price discrimination, and still depended upon subsidy. There was by definition no coordination of marketing, the railways were difficult to fit into any national integrated transport plan, and ticketing was very obscure and became very expensive. There was no consistent service, the train companies had little reason to invest in stations, older staff became a cost centre rather than human capital of high experience, and train operating companies had every incentive to charge inelastic commuters as much as they could, leading to the loss of public support for the railways and to strain on roads.

Privatisation did bring some benefits. There was outside investment on a large scale—Virgin trains introduced ‘pendolino’ trains from Italy, for instance, which were the first of many attempts to encourage adaptive high-speed trains, though they were less advanced in many ways than a nationalised ‘British Rail’ project. Station improvement did occur. Ticketing technology was upgraded.

This was balanced by the crashes and safety collapses which occurred because of the separation of track and maintenance, and because the original track and station company, Railtrack, was intended to be a share-based profit-making company, which meant that it pursued lower costs rather than the highest arguable standards. Railtrack collapsed and was replaced by Network Rail, which was a government-controlled non-profit company. In part, the railways were therefore already renationalised by the early twenty-first century.

During the austerity between 2008-2017, and then in the covid crisis of 2020-2, railway travel first fell and then collapsed. This meant that many franchises could not maintain the level of service required, and that their productivity fell. They were not allowed to raise prices or cut provision because of government regulation. Several simply returned the franchise to the government, or were forced to give it back. This was a second sort of renationalisation.

The argument for renationalisation was that the private sector had invested as much as it could during the financial booms between 1995 and 2008. Economies of scale in a new integrated network could allow for better marketing. From 2017, the British government also wished to invest in high-speed rail networks, and in rebuilding rail across the country from a bare intercity and freight service into a genuine competitor for cars, not least because of the net zero agenda. A concern for a positive externality of railway expansion (the ability of people to move away from cities and to spread demand for housing, lowering housing bubbles in urban areas) outweighed the concern for the effect on commercial landlords and city centres of moving people away, especially after the covid ‘work from home’ boom.

A renationalised and reintegrated rail network could more easily procure or produce rolling stock, but risks and costs would be nationalised too. This could mean that taxpayers once again paid for slightly less reliable stock or services, and had to bear the effect on the budget and the national debt. There would also be a temptation to cut costs when the government wished to make savings, which would not allow for a consistent policy of development. This was balanced, however, against a perception which had arisen from the way in which privatised rail was subsidised that the previous settlement had privatised rewards and maintained public risk anyway.

Across the years of privatisation, the public had not forgotten the failures of Railtrack, the East Coast mainline had been more successful as a government-run franchise than a private one, and Network Rail had prospered (especially compared to its predecessor, Railtrack) as a non-profit company. Many west European governments also ran very high quality, straightforward, and relatively cheap public railways, whereas the British ones were some of the most expensive in the world.

From an historical point of view, this was partly because railways had grown up in the nineteenth century to move coal and goods around a country without a fully developed road network. This also caused supply chains to be based around train depots. After two world wars, and no profit, the railway companies virtually collapsed, leading to nationalisation not for strategic but for emergency reasons. When coal began to decline in the nineteen fifties, and motorways and car ownership became government policy, an extensive railway network became too expensive for the state. This led to the Beeching cuts and the attempt to make railways an intercity service with a freight arm, and the destruction of lots of local lines. Railways were in effect made dependent on the health of the car industry and the lack by many of a driving licence. Once this factor changed, railways became a drain on a state suffering from stagflation, which is why they were privatised.

All of these conditions were in question or reverse by the 2010s. Petrol driven cars, parking, and driving in cities were all becoming very expensive, and congestion was a major problem. Housing costs were rising, encouraging commuting and creating a public demand for local rail lines and new national lines. The rise in passenger numbers was greater than the ability of the private sector to cope. The smaller and smaller profit margins of the franchises turned into losses as average costs rose more quickly than revenue, and the public became concerned about overcrowding and punctuality. These were systemic problems that could not be solved by a change of private ownership.

There were also powerful alternative examples to the franchised and privatised railways, and national transport policy in general, in the existence of Transport for London and Scotrail. TfL operates trains, underground systems, and road and river traffic for a core of 8 million people on a public basis. This is more than the combined systems of Scotland, Wales, and the north of Ireland. Until 2020, it was doing so successfully and with greater reliability than the privatised train network. In addition, Scotland had one national franchise, Scotrail, which in 2023 will become a nationalised entity largely on the basis of the arguments for public control of natural monopolies. Neither of these developments will significantly increase public spending, because the public already subsidised the predecessor entities.

The argument for rail nationalisation is therefore now a balance between the argument of market failure and government failure.

On the one hand, the market structure is one that tends towards natural monopoly in the track, stations, and maintenance. In ticketing, monopoly or at least a monopoly system of ticket recognition and coordination is necessary to avoid even higher costs and price discrimination. Franchises have small or no profit margins after the covid crisis and this is likely to continue. Very great public investment, accompanied by government land purchases and legislation, is needed to develop the railway network because the market cannot deliver easily or at best value.

On the other hand, however, government failure is a risk in a nationalised system. Governments may, simply by owning the system, convince the public that they are investing as much as is available whilst in fact restricting investment because of costs. Political decisions might encourage x-inefficiency and higher costs than were necessary, for political reasons like a wish not to increase unemployment. Government regulatory bureaucracies which grew up under privatisation might, according to public choice theory, invent rules and regulations to keep themselves in jobs. It is not a given that government ownership would lead to an integrated national transport plan, and governments themselves might engaged in forms of price discrimination and subsidy which benefitted some demographic groups at the expense of others.

When the cost of investing for little return makes franchises uneconomic, and because the decline in intercity use of railways seems as great as the pressing argument for new short-distance railways and connections between towns and villages, or high-speed networks ‘up and down’ the country, the argument for nationalisation wins over privatisation. Many companies could not justify involvement in the industry to shareholders unless they were operating either an oligopoly or a national monopoly, neither of which governments and commuters would allow. This is why the government in 2023 will introduce Greater British Railways, an integrated and publicly-owned structure based on Transport for London.