Monday, September 5, 2011

Funding Future Railways

The latest rail fare increases are predicted to average 8%, and over three years this rate of increase will compound to over 20%, leading to massive season ticket prices for commuters.

One of the advantages of private enterprises is they can borrow money off banks to invest in projects that will make them money in the future. By contrast, a enterprise in public ownership borrowing money will add to the national debt. In business, you borrow money so that you can invest in improving your products or services. Why would you borrow money? Well, assuming the business doesn't have enough cash to fund the investment, you need to. If you put the price of your current services up, they would no longer be competitive, so you'd likely go out of business before you could get the improved service to market.After all, why should your existing customers care about services they may not want or need in the future?

So, when the railways - which are private enterprises - need to invest in improved services for the future, they should be borrowing money. They should be able to get pretty good rates of interest - the railway sector is effectively a monopoly guaranteed a stable or increasing business, and with the price of motoring rising and other pressures, the future prospects are good (after all, increased passenger capacity is why they're investing). Yet the railways are doing precisely what a private enterprise shouldn't do - making their existing customers pay for future services that they may not even benefit from. The only reason they can get away with this is because there is no effective competition. Which rather begs the question: what is the benefit of having private companies running the railways, if they behave to all intents and purposes like a public monopoly?

If you are going to indulge in centrally-controlled cross-subsidy - which is what this government is doing by getting today's train users to pay for tomorrow's services - it would make far more sense to treat the whole transport sector as a holistic entity - which is what it is. By singling out railway users to pay a tax to pay for future transport investment, you create a perverse financial disincentive to use the most environmentally benign transport mode. Motorists should also pay this tax. That way, the playing field would be levelled in financial terms. There isn't a wholesale flight from the train to the roads is for two reasons:
1. it so happens motoring costs are currently also rising. But that's not guaranteed to continue.
2. there is nowhere near enough road capacity to absorb significant numbers of additional journeys.

However, if motoring costs were to go down, that could quite easily result in a significant displacement from rail to road - and with it, an increase in congestion, with its attendant costs on businesses. In that case, you would have reduced fare revenue denting the train companies' ability to invest, and additional congestion-related costs  that aren't being used to invest in anything - skilled workers sitting in traffic jams is simply lost productivity.

1 comment:

  1. It's the bizarre way that the railways were set up on privatisation, which allows -- encourages, even -- operators to walk away with the profits while dumping debts and investment commitments on the government.

    Train Operating Franchises only last a decade or so (or have so far), so the operators have no incentive to make big and long-term investments: they might not be the ones collecting the revenues when it comes to paying back the loans. Chiltern have been given a 25 year franchise and they are making a big investment in the infrastructure.

    Network Rail, who do most of the track construction and maintenance anyway, are a bit public and a bit private -- a bizarre arrangement that allows them to continue racking up a staggering debt without it appearing in the national debt. (But without the government being able to control the executive bonuses.)

    It looks like future franchises will be of the 25 year variety, with closer cooperation between the trains people and the track people to encourage and enable the investment you're suggesting -- time will tell...