Railtrack attack

According to documents released under the Freedom of Information Act, rail regulator Tom Winsor tried to prevent inept UK rail infrastructure company Railtrack from going bust shortly before its unlamented demise in 2001. Mr Winsor agreed with the company’s plan for the government to give it money on demand for four years, in exchange for an equity stake.

Transport minister Stephen Byers was less than keen on this idea. He pointed out, reasonably, that renationalisation, restructuring or receivership were the only options on the cards: granting massive subsidies to private sector companies that have utterly screwed up isn’t a sensible industrial policy. Mr Winsor was overruled, and Railtrack died.

As one might expect, the ‘economists’ at the Adam Smith Institute get entirely the wrong end of the stick. "You might have come to the conclusion that the privatization of Britain’s rail network was a bad idea that was doomed to fail. You’d be wrong. The fate of the privatized infrastructure company Railtrack was murder, not natural causes.".

Silly sods. Railtrack died because the government refused to bale it out with massive subsidies following its massive, epic incompetence. If you’re a free-market think-tank, what the hell are you doing suggesting the government should give massive subsidies to failing companies?

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18 thoughts on “Railtrack attack

  1. Which only leaves two questions:

    1) Why do they keep bailing out epicly incompetent rail operators with massive subsidies?

    2) Why don’t they do the sensible, rational, popular, efficient thing, and nationalise the railways? In fact, why are the Labour Party so insanely dogmatic in their refusal to even consider nationalisation? Why are they hell-bent on privatising the only operator currently in the public sector (which also happens to be the operator taking the lowest amount of subsidy and also the operator offering the highest levels of punctuality and service)?

  2. Sceptical that that’s the best outcome.

    The big problems screwing UK rail at the moment are i) cumulative effect of historic network underinvestment, whihc causes delays and ii) major bank oligopoly on rolling stock, which massively inflates the costs of running old trains and therefore makes low-traffic railways unviable.

    Pretty much all the operator bailouts to have taken place are due to network fuckups – Virgin got paid its compensation because it based its business plan on a binding contract with Railtrack to upgrade the WCML to 140mph by 2003.

    An ideal bill would nationalise the rolling stock owners with the minimum possible compensation, then flog their trains to the highest bidder while maintaining strict rules to stop consolidation (so that there’s actually competition). Allow train operators to bid for their trains if they want (although they’d be forced to sell them in the event that they lost their franchise)

    Keep SET in the public sector as a benchmark, and specify that private operators need to meet or exceed its performance in order to win franchise bids.

  3. I think the title of this post should have been "Uh?" –
    I do sometimes wonder if the ASI hasn’t been hijacked by some satirists intent on discrediting Dr Madsen and friends.

    As to the leasing, apparently First Group have managed to buy a few HST sets – hopefully that might be the start of something? In fact, I’m surprised someone isn’t running around buying up all the perfectly good Mk3 stock, doing a refurb and leasing it to the operating companies at knockdown rates. Well, I’m not really surprised because I know that’s impossible, but you know what I mean…

  4. Yup, it would be great. The reason why it ain’t happening, as I’m sure you know, is that HSBC, RBS and the others would rather leave the MK3s to rot in sidings than sell them on and undermine their monopoly.

    Thinking about it, you wouldn’t even need to renationalise the ROSCOs: just impose a rule saying that any train being scrapped must first be offered to other bidders who are willing to pay the scrap price (if there’s more than one bidder, then you can have an auction), and that any train that’s been idle for more than 12 months counts as ‘being scrapped’ for the purposes of this rule.

  5. Good old ASI. Quite how you can stomach reading all this stuff is beyond me.


    "An ideal bill would nationalise the rolling stock owners with the minimum possible compensation, then flog their trains to the highest bidder while maintaining strict rules to stop consolidation (so that there’s actually competition). Allow train operators to bid for their trains if they want (although they’d be forced to sell them in the event that they lost their franchise)"

    Reproducing the problem, surely? What’s so great about competition? I’d rather have, say, an effective, centralised timetable and "uncompetitive" cross-subsidies of rural lines than "competiting" rail companies chasing business traffic on the London-Manchester run to the exclusion of all else. The railways are an object lesson in why, no matter how sophisticated the contracting system involved, damn great natural monopolies do not lend themselves to the market.

  6. Meaders:

    The competition I meant was specifically on renting rolling stock (so a rural operator can successfully rent end-of-life trains for cheap from a cheap company, instead of being forced to pay almost as much as it costs to rent a new train as at present), rather than on routes.

    I’ve got an open mind on contracting, especially if we keep a public sector railway as a benchmark. Train operating is the kind of non-capital-intensive, not-long-term, customer-service-based natural semi-monopoly (semi because there’s competition with other transport modes) that should theoretically benefit most from being run by for-profit companies, and the non-shit companies without disintegrating tracks underneath them (eg GNER) have appreciably improved the travel experience compared with BR.

    D^2: can’t from this PC, but will when I’m home in a few hours.

  7. On the subject of competitive structure for railways, I think that the fundamental one is a cost accounting and overhead allocation one, and a good textbook example of what’s wrong with marginal economics. There is always pressure to set MC=MR in pricing the network to operators, and the marginal cost of allowing one more train to run over the rails is close to zero as makes no odds. Rail track maintenance doesn’t come in continuous functions; it comes in discrete units, and there is thus a more or less intractable problem of creating a correct "fully allocated" cost of running a train on a track, let alone a differentiable one that would allow classic Marshallian price-setting.

  8. Correct, and yes, respectively. Please can you mail me at gmail (john dot band) from whatever account you’re using at the moment…?

  9. Of course, historical under-investment is the route cause of many problems. But attempts to reverse the under-investment are negated by the presence of the private sector. The problems in rail were not caused by market failure or working practices or poor management, but, as you say, by decades of under-investment. In those circumstances, all that was needed was greater investment. Involving the private sector was a barrier to that, as the investment needed was bled away.

    The same is happening in health – the government’s massive spending increase has been blown on PFI, the money barely touching the sides as it was sucked straight through the NHS and into the pockets of big business. Having private companies run cleaning services in hospitals has been a diasaster. Having them build and operate new buildings in the health and education services has already lead to massively inflated capital costs, and will lead to operating costs being much higher than they would otherwise be for the next thirty years.

    It is also happening in education, a variation on the theme is happening in the fire-service, in fact across the board of the public sector the government is tying spending increases to "modernisations" of this type which render those increases utterly useless. The only way to solve the problem of under-investment in the public sector is, frankly, to throw money at it, but the private sector, which the Thathcerite dogmatists insist must be involved and must be followed, is just getting in the way, grabbing that money before it can reach the target.

  10. The burden of my rather cryptic comment above is that there is an "information bottleneck" in the planning problem when you have the track owned by a different entity from the one running the trains. The planning problem is one of

    a) maximising efficient use of the network
    b) minimising the cost of repairs
    c) reducing to an acceptable level the risk of catastrophic failure
    d) creating a fund to pay for future improvements

    It’s very difficult to solve all these problems simply by the use of the price mechanism. Side-payments and legal contracts help much less than you’d think, because they introduce huge numbers of opportunities for strategic behaviour; it’s all very well for Virgin to base their entire business plan on the WCML improvement, but they wouldn’t have done that if it was a project that they were carrying out themselves, rather than one the failure of which they could be compensated for out of bottomless pockets.

    It’s to solve coordination problems like this that firms exist in the first place. I don’t know what Ronald Coase actually thinks about this, but I’d suggest his theory points to either private monopoly or nationalisation.

  11. Not much of significance to add, but I like Gregg’s maybe intentional apposite homonym:

    historical under-investment is the route cause of many problems

  12. d2: You’re right about the problems of side-payments and byzantine contracts being no substitute for markets. The bizarre privatisation structure guarantees inefficiency as there isn’t enough choice in the micro-markets for it to work. Railways are naturally vertically integrated.

    I disagree with you about Virgin basing its business plan on a capital investment: if they were making the investment and doing it themselves, they’d (a) make damn sure it happened and (b) quite happily go to investors basing a business plan on it working.

    Private railways used to work in the UK. Why were they nationalised, other than ideology? They seem to work OK in Switzerland, too.

  13. I think Dan’s point was that since Virgin’s management are less insane than the Railtrack management, they would never have signed up to something as mad as Railtrack’s "let’s assume a new technology is magically invented that justifies our assumptions" WCML modernisation plan.

  14. they’d (a) make damn sure it happened

    I happen to know one hell of a lot about the West Coast Main Line (it is/was a cause celebre for Plaid Cymru) and no they wouldn’t. The WCML upgrade is a more or less intrinsically intractable task. The problem is the section between Chester and Holyhead (which is massively important to the economics of the whole project as this is a main goods route to Ireland). There are dozens of small tunnels and the rails run along the North Welsh coast on terraces cut into mountainsides in some very difficult geology (slate). British Rail didn’t upgrade this line for a reason, and the reason is that nobody really knows how to.

    Switzerland doesn’t have "private railways", does it? SBB is owned by the cantons, isn’t it? If there are any private railways in Switzerland I would suspect that they are funiculars or two-point lines, which are hardly the same sort of thing as network rail.

  15. SBB is state-owned. UK railways were nationalised (alongside most of the other things nationalised in 1945-50) because they were bust, although some pro-privatisation types claim that they were only bust because the government screwed them over during WWII.

  16. It’ll be interesting if the Adam Smith Institute are as keen on public bailouts in the case of Rover as they are with Railtrack.

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