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The Labour Government’s latest attempt at reforming railways in Britain by bringing them back into public ownership, without actually spelling out in detail how this will work in relation to the Great British Railways project, suggests a lack of imagination on the part of the government. It’s time we moved beyond the complication of having a rail franchising system operating within a state-owned railway structure. Britain can and should be more ambitious and therefore opt instead for ‘Open Access Rail’ throughout the system.
The bankrupt Rail Franchising System
Ever since the inception of rail privatisation in 1996 under John Major’s government (The Railways Act of 1993), there has been a business model called the rail franchising system. Under this system, private companies bid for multi-year contracts which allow them to operate on specific routes. Once the bids are submitted, the government selects the winner taking into consideration factors such as the overall service intended, passenger benefits and value for money. Different franchises run on different routes/in different areas and have bespoke standards and specifications, which they must adhere to by law. These can include frequency of service; station upgrades as well as meeting passenger satisfaction targets.
There are several issues that arise with the rail franchise system. I will focus on two, the monopoly status of them and the size of the state subsidies required to enable them to function.
Private monopoly
Fundamentally, rail franchises deliver no genuine competition. They are mostly regional monopolies, with one company providing the service on any given route. This removes the incentive for price competition, resulting in higher fares compared to other European countries. The fragmentation of the state owned and managed network created the illusion of competition, not the reality. The Financial Times published a report a few years ago on the privatisation process that revealed that franchising was both a disaster and a political trick to win local approval – it is ‘pretend’ free-market capitalism. The respected railways writer Christian Woolmar points out the basic problem of privatising rail, is it that it is a natural monopoly, that requires considerable public investment and provides an essential public service and that running it as a private monopoly, for a profit motive, takes away the essence of what the railways represent.
High costs and public subsidy
The franchising system is often more expensive than public ownership because of the complexity of managing many fragmented, short-term contracts that only last on average between five and ten years. In addition, the costs of private leasing for trains and marketing, along with dividend payments for shareholders, all suck money out of the system that could otherwise be reinvested.
A study by the RMT union, reveals that the three-decade franchising system has seen at least £31 billion leak out of the system, mostly into shareholders’ pockets, while passengers are paying 20% more in real terms to travel on a deteriorating network, which is suffering from a chronic lack of investment compared to when the railways were publicly owned. The report also found that possibly more than £12.5 billion in subsidies, is extracted from the government by train operating companies, rolling stock leasing companies, subcontractors and others. All these additional costs are a consequence of fragmentating the railways.
Why a state led, nationalised Railway system is not the solution
Despite highlighting some of the failures of the rail franchise system, the answer is not to revert back to a state-led railway system, as is currently the plan of the Labour Government. Furthermore, as liberals we should strive to produce solutions to issues like the railways, that favour free-market outcomes over centrally planned ones. I will explain why I do not believe that a state-led nationalised railway is the way forward.
Lack of competition
Without private enterprise and the profit motive, state-run monopolies may lack the motivation to control costs, improve customer service, or expand the network. While the government absorbs commercial risk and this allows for unified ticketing and coordinated networks, it can reduce the competitive, profit-driven incentives to cut costs or innovate quickly compared to a private led railway.
In addition, free-market economists argue that without the fear of bankruptcy or the need to compete for market share, management can become complacent. Any publicly run enterprise, whether a railway or any other business will often face criticism for excess bureaucracy, which can slow down innovation and long-term development. Lastly, British Rail faced another crises, due to a lack of competition, namely underinvestment compared to the privatisation of the nineties: this amounted to nine-fold real terms increase, in terms of investment, during the period of 1994-2014.
Political Interference
Governments may override commercial and operational management for short-term political gain. This creates structural problems by substituting passenger demand and economic logic with political ideology. Publicly owned railways can be subjected to shifting political agendas. For example, government caps on fares (as we have seen in the publicly owned Scottish rail service, Scot-Rail) or budget cuts to curry political favour can lead to delayed maintenance, ageing infrastructure, and a reduced overall capacity to expand the network.
Furthermore, under British Rail, politicians could dictate train frequencies, intermediate stops, or route expansions to favour specific constituencies, sometimes overriding regional economic needs to appeal to their local voter base. In addition, the Department for Transport (DfT) or railway quangos would often dictate day-to-day operational matters, such as the exact colour of liveries, station amenities, and minor staffing schedules – very much akin to a statist, top-down approach that the Soviets would have been in favour of – hardly something to aspire to, as an alternative.
Open Access Rail: a truly free-market alternative
Why not replicate airline practice with companies competing with each other for fares and for passengers traveling to a certain destination, within our railway system? This is what Open Access Rail currently offers. These services are operated on a commercial basis by private companies: they often compete with train operators which hold government contracts. Unlike the rail franchise system where you only have one private train operator for any one given route, under a truly open access rail system there could be multiple private train operators all competing against each other on any given route i.e. London to Edinburgh. Currently, there are five open access rail operating passenger train services on the rail network in Great Britain, including Lumo, Grand Central and Hull Trains.
There are two areas whereby Open Access Rail is superior to the rail franchise system and indeed a state-led, nationalised railway system.
Open Access Rail stimulates competition
By introducing a competitive dynamic on trunk routes, open access operators pressure both state-backed and franchised operators to offer better value and higher service standards. Furthermore, unlike the rail franchise system where you only have one rail franchisee per route – therefore stifling competition – an open access rail system would naturally bring down costs to passengers because several open access operators would compete against each other.
In a report by Tony Lodge, recently published by the Centre for Policy Studies, he highlights the fact that open access competition on the East Coast Main Line (ECML) has not just seen new, popular rail operators enter the market, but has pushed the dominant franchise operator, LNER, to improve its services to customers. In addition, Lodge also notes that European railways are beginning to copy Britain’s existing open access operators model and have seen a 40% increase in passengers and fare reductions of between 20-60%.
Market growth
Open access does not simply steal customers from existing services, it provides consumers with choice, which the rail franchise system or indeed a state-led nationalised railway system, fails to do. In addition, by offering attractive pricing, they can generate entirely new journeys, expanding the total size of the rail travel market, as innovative newcomers like Ryanair and EasyJet did for air travel in their day.
Open access operators have proved highly effective in growing the overall market, rather than just cannibalising existing traffic. For example, since Lumo launched (a subsidiary of First Group), the East Coast Mainline has seen demand increase by up to 30%, adding millions of additional journeys which otherwise would not have existed.
Fresh thinking is needed for our railways in the 21st century which breaks free from the bankrupt rail franchise system or a return to a state led nationalised system from decades ago. It is far from clear that Labour’s current plans for Great British Railways, influenced by the unions that bankroll the party, point to anything other than a better yesterday. By opting for a fully integrated Open Access Rail system, we as Liberals are advancing the fruits of the free-market, namely advocating for competition and consumer choice – both of which are currently lacking.
