Privatisation or nationalisation: What's the next stop for Network Rail?

23 Sep 15

A government review is considering reforms to the state-owned rail company, including possible privatisation. There are a number of options that the study must consider.

In July, the government embarked on a review to ‘develop recommendations for the longer-term future shape and financing of Network Rail’ following cost over-runs and missed targets from the organisation that manages our train lines.

This weekend, the leader of that review, Nicola Shaw, was criticised for revealing that she is looking at all ‘options on the spectrum from where we are now to full privatisation’. But, by attaching such totemic importance to the word ‘privatisation’ such critics prompt a binary debate that flunks the complex questions at hand. The question is as much what and how to privatise as whether.

The over-riding objective for the management of railway infrastructure is that as far as possible decisions should be demand-led. In other words, they should be informed by what current passengers and future passengers want and are prepared to pay for while also being accountable and cost efficient. For fiscal reasons, the chancellor may also be keen to see investments financed privately rather than on the public balance sheet.

Against these objectives, Network Rail as a concept scores poorly. With investment now coming on balance sheet (from 2014), the benefits of the structure are hard to see. Accountability in rail is split, meaning that there is little incentive on the monopoly track manager (Network Rail) and train operators to collaborate and coordinate investments and improvements that would be in the interests of passengers on the line.

Nationalising the whole thing (track and train) resolves the accountability dilemma in a simplistic sense. The downside is that you lose a lot in the process: the incentives for innovation that exist for rail operators and the responsiveness to passengers. Investment also becomes subject to the whim of the electoral cycle. The latter often leads to putting off infrastructure investment for more jam today; or doing eye-catching stuff rather than humdrum upkeep. We might also want to note that passenger satisfaction in the UK is high by European standards.

Full-scale nationalisation is also off limits for Shaw’s review. So, beyond the nuclear button that Jeremy Corbyn would press, what are the options? And, is the idea of privatisation necessarily wrong or indeed a helpful mode of analysis?

1. Safety-first: A pared-back Network Rail

The safety-first option would be to keep track and train separate, pare back Network Rail, put it under new management, task it with achieving specific maintenance goals and reclaim strategy-making into the Department for Transport.

This could be supplemented by encouraging greater collaboration between train and track operators. In July, the government decided to channel the entire subsidy that is spent on rail services via the train operators rather than, as currently, dividing it between the operator and Network Rail. This is a good move which should make the subsidy more transparent, could encourage a more commercial relationship between Network Rail and the operators and would send market signals for where more investment is needed. It would also make it easier to charge open access competitors a commercial access charge. This could be strengthened through stronger incentives for franchise holders and Network Rail to enter into risk-sharing initiatives.

The problem is that this looks pretty similar to what has been tried in the past. Now that Network Rail’s debt is on the balance sheet, it is as vulnerable to short-termism as any other part of government; so, any potential benefits of independence may be illusory.

2. Privatise Network Rail as an asset management company.

The government could privatise Network Rail as an asset as it did to regulated markets such as water and telecoms in the 1980s and 1990s. Superficially, the upsides are attractive. The costs of future investment would be borne by private rather than public finance. Political interference in investment decisions would be reduced. It may also inject greater market discipline into programme and project management by a commercial firm accountable to its shareholders.

However, for all its simplicity, it would preserve the accountability divide between track and train that we have currently and it would require a similar level of regulatory intervention as it would have a lot of market power. Policymakers may also want to reflect on the relative performance of a precursor. Would any government want to be seen to re-creating Railtrack?

3. Concessions line by line

Nicola Shaw could look closer to home and replicate the model of HS1 (for which she is chief executive) across the network. HS1 is run as a concession with responsibility for train and track infrastructure vertically integrated for a 30-year contract. This reduces the need for regulation during the lifetime of the contract because the interests of track and train are the same (although the government would need to find ways of ensuring that infrastructure was returned in a reasonable state at the end of the contract). It also puts the financing off balance-sheet.

However, this option is unlikely to be applicable across the network. While it would work well for new, additional lines where there is clearer separation from the rest of the network and on some intercity routes that have the same features, in many places the network is shared by more than one train operator or franchise. Here, the desired incentives would not materialise. The government would also have to look afresh at competition because it would require much longer contracts and higher finance requirements. This would mean fewer points of competition (every 30 years say rather than every ten years) and potentially fewer bidders for contracts. There may be concern about whether enough firms would be positioned to take on these risks and whether competition would suffer.

4. TfL for the regions

Where journeys are predominantly sub-national in nature, government could vertically integrate responsibilities by devolving accountability to more local democratic bodies. As part of the Northern Powerhouse initiative, Transport for the North is now combining the accountability of the Passenger Transport Executives and other local authorities to take responsibility for all transport services in the north of England. Such approaches can also boost integration across modes (e.g. train, bus and car). An ambitious tactic might be to supplement local commissioning with devolution of regulatory control.

What’s good for London (Transport for London) and for the Northern Powerhouse could work elsewhere. Clearly, however, the principle only holds where the large majority of journeys are intra-regional, otherwise accountability to the consumers of the services is limited.

So, which approach should Shaw go for? Personally, I’d opt for a mix of (3) and (4) and against (1) and (2). But that’s only half the point of my argument: my preferences aren’t really about whether we privatise. But with the Labour Party set against any involvement of the private sector in pursuit of its ‘people’s railway’, that’s where the debate is being dragged.

 

This post first appeared on the Social Market Foundation website

  • Nigel Keohane

    Nigel Keohane is the director of research at the Social Market Foundation

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