Trainwreck? Fixing Britain's Railways

Train at London Liverpool Street

Whatever Ed Miliband's response to Labour voices urging rail nationalisation, he should reject the status quo, which symbolises broader national ills.

Ed Miliband is under increasing pressure to renationalise the railways, should Labour win in 2015. Policy motions on the topic are planned for Labour's National Policy Forum, and a letter from leading figures on the left in Sunday’s Observer supported the move. While Britain’s railways were privatised in 1994, nationalised systems continue to thrive across Europe. Would public ownership be in the public interest?

The next government will have three options: full nationalisation, full privatisation, or maintaining the franchise model – the status quo.

It is hard to travel on France’s swift, comfortable and attractively-priced TGV without feeling envious of our neighbours’ state-owned rail system. Would a nationalised British railway achieve value for passengers and taxpayers?

Worryingly, Britain’s old nationalised railways haemorrhaged money. Richard Beeching’s ruthless closures of underused lines failed to stem the flow. In 1981 British Rail passed on a loss of £897m (£2.8bn in today’s money) to the taxpayer. Although today’s private train operators receive a similar net subsidy (£2.71bn in 2011), passenger numbers are almost double what they were under nationalisation, cutting the net subsidy per passenger in half.

Presumably, the difference is made up by the passenger in the form of exorbitant fares. The current situation for commuters dependent on rail travel is miserable, but under state ownership in the past, poor taxpayers who didn’t use the railways subsidised rich ones who did. In this age of austerity, a nationalised railway that drained the public purse would not be politically feasible.

Adopting the renationalisation agenda would be a bold and radical move for Miliband. But if he does so, he must demonstrate that it would be fiscally neutral. He must also show his system would maintain the improvements that the 2013 Brown Review found to have come about since privatisation in quality and quantity of trains, punctuality and passenger satisfaction.

By contrast, the case for full privatisation is unlikely to be made any time soon – unless UKIP champions it. The argument has problems. There will only be one railway between most destinations. It is simply not cost-effective to build two railway lines following the same route between, say, London and Oxford. If there are multiple train operators using the same track, they may compete on price, but will find it hard to compete on punctuality since one operator’s delayed train can block the track, causing delays for other operators running subsequent trains.

Despite these difficulties, the price competition involved would have genuine benefits for passengers (although until passenger numbers increased, it might also cause job losses and lower salaries). It would be implemented by auctioning off every time slot on a given line to the highest bidder, so that one operator might secure the 8.15 departure slot, and another the 8.25. Passengers could then make a decision based on price and convenience. A full privatisation along these lines would therefore improve on the status quo, although it would not work as well as a perfectly-functioning nationalised system.

Yet the current arrangement cannot be allowed to continue. In our opaque ‘franchise’ model, the Department for Transport awards contracts to favoured rail operators in an ultimately subjective decision. As the Brown Review found, the capital requirements for operators are a barrier to entry for small companies, meaning that corporate giants do not face proper competition.

With only one operator on most routes, and commuters locked in, the only downward pressure on prices comes from government regulation, politicising the price-setting process instead of leaving it open to market forces.

The absurdities of the franchise model were illustrated by the West Coast Main Line fiasco, in which the government awarded the franchise to FirstGroup, only to reverse its decision in the face of a legal challenge from Virgin Trains once it became apparent that the bidding process had been seriously flawed.

This episode would be enough to show that, whatever one thinks of nationalisation, Miliband would be right to reject the status quo. But the sorry state of Britain’s railways is a symptom of a wider national sickness.

As Office for Rail Regulation figures from April show, rail operators relying on taxpayer subsidies to stay in the black have nevertheless been paying dividends to their shareholders. Such behaviour lends credence to the view that Britain’s railways today are neither public nor private, but the worst of both worlds. They symbolise Britain’s growing shadow state, seemingly designed to maintain Whitehall’s control while avoiding democratic accountability.

We put the contracts out to tender, but award them at the mandarins’ discretion. We leave prices to the market, then cap them. We nationalise the losses, and privatise the profits.