Monday, November 16, 2009

More on the railways, and thoughts on the privatisation of services

Further to your humble Devil's criticism of rail privatisation—they aren't really private at all—the Adam Smith Institute blog has covered the renationalisation of the East Coast Line; and Eamonn Butler's piece raises some issues that I failed to notice.
This is, of course, exactly how rail franchising is supposed to work. Services are put out to tender, and are run by private companies, but if one of them comes a cropper, the government steps in until another provider can be found. The only trouble is that the government has been stepping in rather a lot lately. Not because the private sector is inherently flaky, but for a couple of other reasons. First, the government screwed the operators down too hard on price. Many of them already had made considerable investment in the rail industry and were not prepared simply to write it off. So they paid over the odds. Then boom turned to bust (thanks, Gordon) and their figures started to look a bit sick. Second, the government drew up its franchise agreement so ineptly that when the chips are down, it is far cheaper for an operator to fold than continue operating a service. Step forward, the taxpayer. Frankly, it's no way to run a railroad.

The thing is that the "privatisation" of the railways is, in effect, simply one of the private finance initiative (PFI) and public-private partnerships (PPP) idea that both the Tory and Labour governments latched onto in the nineties.

The idea, very broadly, was that the private sector—in return for the potential to make large profits from monopolies—would pile huge amounts of capital into these public services. The quid pro quo was that they would run them in a way that the state dictated.

The private companies make massive, easy profits off a captive customer base, and the government get to look good by improving services (or at least modernising them) but—and this is absolutely crucial—it also keeps the capital expenditure off the government books.

I believe, however, that both the Tory and Labour governments had an even more subtle agenda: the privatisation of public services by the back door.

No, bear with me here! Although, I'll admit that the following is purely speculation...

As I intimated in a comment on my Friendly Societies piece, many people in the apparatus of the state (although Brown is possibly not one of them) have started to realise that current levels of government spending are utterly unsustainable. Not only that, but the huge increases in cash simply haven't produced the rise in service quality that was hoped for.

What to do? The government is already spending billions more than it is getting in tax revenue—nearly £200 billion more this year alone. Yes, this year is particularly bad for the public finances, but even in the good years the government has borrowed ten of billions.

This simply isn't sustainable: even the British government will reach a point at which they can no longer get credit (although they are likely to reach a point where it is simply too expensive for them to borrow more). That point obviously hasn't been reached yet, but should the state stick to the projected spending rises, it won't be too many years before they do.

Think about it: not only is the government not paying down its debt, it is actively increasing it—by about 40% of total spending—every single year. This is not prudence, that's for sure.

At the same time, having splurged on public sector appointments and then increased salaries (and, in far too many cases, having to up the pension payments), the government now finds itself in a bind: if it starts sacking thousands of public servants, not only will the unemployment figures rocket upwards but they will also have lost a good number of voters. Besides, the politicos know as well as we do that "efficiency savings" simply don't happen, c.f. the Gershon Report savings, which have been largely illusory.

Not only that, but the NuLabour government is further hamstrung by the fact that the Party is now almost entirely funded by the unions—the bulk of whose members are in the public sector. And the unions are already starting to cut up rough.

Government-sponsored cuts are going to be hard enough for the Tories: they are impossible for Labour.

So, it's time to turn to the private sector—those evil companies sack people all the time, right? And the unions don't have nearly such a strong hold there either. And the government can deny all responsibility as far as job losses go, too.

But the British love their public services—the NHS is the wonder of the world, our education system churns out A grade after A grade, and the oldies are thrilled with the state pension.

So how to make this transition? Now, were I in this situation (and not so damn impatient), I would carry out the exercise in three parts.
  1. The first part would be the transfer of the assets to the private sector, whilst maintaining government control.

  2. The second part would be the transfer of the administration to private entities, whilst maintaining some control through full or partial government funding.

  3. The third part would be the handing over of complete control of the service to the private entity and, crucially, the privatisation of the funding.

The first part has, in many cases, come to pass; many of the schools and hospitals built under PFI remain within the control of the private company even at the end of the contract. The company often runs some of the repair and maintenance services, or other facilities, throughout the life of the contract too.

The second part is also coming to pass. Think about the Tories' plans to make some schools effectively independent along the Swedish "free school" model—not to mention NuLabour's Academies.

In the NHS, more hospitals are applying for—and being granted—Foundation Status, giving them far more control over the administration and budgets (and they are no longer run directly by the Strategic Health Authority but by an "independent regulator" called Monitor).

The Primary Care Trusts, too, are being split—separating their commissioning and providing arms into what are, nominally at least, entities independent of each other. Moves like this suggest to me that the so-called internal market is being set up to become a proper market of competing companies.

For the moment, the third part—the independent funding—has not yet been implemented, although there have been rumblings and rumours of the NHS being a paid-for service, as well as compulsory medical insurance to cover your old age care. The government has most certainly suggested that everyone should be forced to contribute to a private pension.

Now, as I freely admitted, the above is all total speculation on my part—but I'm willing to take a long bet that I am not totally wide of the mark. Even if the privatisation of public services is not on the current government's agenda, all of the foundations for doing so are in place—it just needs someone to start pulling the levers...


The Moderate said...

Dear God, but it's almost worth voting the cunts back in so they have to deal with the absolute monstrous mess they've created.

But of course, that's exactly what they want.


Anonymous said...

Where's Patrick Vessey when you need someone to explain basic economics to a delinquent Devil?

State-granted/natural monopoly anyone?

Devil's Kitchen said...


Could you expand, please? I am well aware of the difference that you cite—and yet I utterly fail to see the relevance.


Anonymous said...

There was a rather acrimonious exchange around this within LPUK a while back. Patrick posted an Adam Smith quote on his (now terminated) blog, I don't have it to hand. But the point is that when you have a natural monopoly - such as the railways - handing the thing lock, stock over to a private individual and probable pal of Mandelson etc isn't handing it over to the free market, it's setting up a state-granted monopoly because there's no parallel competitive infrastructure and no space to build more alongside (roads don't quite cut it as competitor, and note that they too are public-owned). Telecoms (BT) was a similar situation but we are being saved by radio/satellite etc (not the pretend landline competition), the same won't be happening for transport.

The basic point being that the difference between a private business running a monopoly and the government nominally running a monopoly is little more than cosmetic. The details are what's important.

Where you can't have meaningful competition, you must opt for democracy: I would say local democracy, IE: if you "privatise" the thing, you privatise it either with very strict regulations (Japan) or as a cooperative of some kind, where there is local accountability on fares etc, not just carte blanche to print money; alternatively place under the control of local government (lazy option).

The other important point to consider is that railways are quite literally "too big to fail", if some money grubbing ponce comes along squeezes the system for personal gain then does a runner the public will have to bail out the railway (unlike banks, there can be only one local railway and it must not fail!).

...also look at utility companies and energy prices, fixed infrastructure, not real competition, story not yet over there...

Devil's Kitchen said...

Ah, I see.

You misunderstand me, Ghandi: I never said that I thought that it was being handed over to a market—I said that it was being privatised. That is something very different, as I am sure that Patrick would tell you.

You will also note that I did not, in any way, endorse such a policy (if it is happening).


Devil's Kitchen said...

P.S. I did mention a market in connection with the NHS, for want of a better word. But then I know more about what is actually happening in the NHS than I do in rail...


Roger Thornhill said...

To me the issue is to establish plurality so customers can vote with their wallets. It is not perfect, but it is the least dysfunctional mechanism and infinitely less imperfect than the State trying to do it*.

Schools are fairly easy to establish plurality and the Swedish model shows this. I must say that I believe the Tory proposals miss the point - they still retain final arbiter position on new schools and require petitioning (oh great ones!) by an LEA, so if yours is chock full of Trots, forget it. If it is stuffed by brown-enveloped lackeys, good luck, cos you are going to need it.

GPs are already, even though the State is trying to control them (hamstring?) more and more and so open the door for Corporate Polyclinics.

Hospitals can. The problem with healthcare is that we are currently bound to our local PCT and thus SHA which operates a de facto geographic monopoly, and as such draws in the hospitals and GPs into that monopoly. Break that, and the plurality can begin. If you stop preventing (I hate the term "allow"!) people from using another PCT to organise and administer their healthcare and make Hospitals independent of PCTs and not bound or funded directly by any one in particular, then you can see that people will tend to** gravitate to the better hospitals and PCTs.

Leave to simmer and you will find that PCT/SHAs will merge, prosper or fold and become de facto health insurance providers. The other angle is to fund them such that it does not interfere with this process and that private organisations can also begin to compete, reducing the chance of a cost cartel. So funding follows the patient.

Rail? Not so easy due to the inability for the market to respond in a decent timeframe. I would propose that we look to how other situations are dealt with. Broadband has a large near monopoly provider - BT Wholesale - yet we buy our packages from all sorts of companies. This model will not translate easily to rail, but it can give clues as to what sorts of things we can look into, as can how TfL (Transport for London) handles bus routes. It might be that rail routes are tendered for at a far higher granularity than is done now. The problem with rail is that one sloppy provider mixed up with all the others can spoil the entire show. Buses can drive around each other, rail is not so easy!

* thinking the State can manage things best or even perfectly is one of the biggest causes of suffering, waste, loss and tearing at beards. Statists and by definition most Socialists are infected by this delusion. It is the Rabies of the Left.

** note "tend to". This is usually all that is needed to push others to compete and shape up. Their alternative is to be shipped out.

Anonymous said...

DK: You are in favour of privatisation of the railways, which - I assume - to you means handing over a geographic monopoly to various individuals who will then run their railway as a PLC, "accountable" to shareholders. This won't do, there has to be accountability to the public else the things will leech the public purse then fail and leech the public purse again in the form of government bailout.

The area around which we agree is that they should be fully handed over to an independent organisation, but the truth is the cannot be sustained unless that organisation is directly accountable to local people/the travelling public etc/staff, IE: local stakeholders! This means that at a minimum stakeholders (not PLC shareholders) should be hiring and firing the directors; if they do this and their railway still fails they will be in no position to complain when fares rise dramatically or stakeholders have to pay to bailout the business.

Basically if you don't perform a realistic privatisation which produces a sustainable monopoly which cannot exploit its position, then central government will always be the final "owner" of the railway, and we'll see it called in time-and-time-again to intervene. Why should national government hire-and-fire and set regulations, and socialise/nationalise the costs? If local stakeholders are empowered then they will be responsible/accountable and the government will have no excuse to wade back in.

Another example of a geographic monopoly is policing: I believe LPUK policy is elected chief constables: this is because LPUK believes there must be strong local accountability and less central government dictat, non?

Devil's Kitchen said...


You make an elementary mistake of taking an industry in isolation.

The railways have a monopoly on railways: they do not have a monopoly on travel.

I favour handing the railways over to private companies (a bit like those companies which built and ran the railways and which, you know, actually competed against one another, e.g. for holiday-makers).

If the railways abuse their position, then people will fly, or drive, or take coaches. As, in fact, they do now.

Because, as I said, the railways do not have a monopoly on travel.


Devil's Kitchen said...

P.S. I am developing a post on this, but I am not particularly in favour of democracy. Especially not in terms of trying to run a business—which is what the railways should be.


Devil's Kitchen said...

P.P.S. The police, however, do have a UK-wide monopoly on law enforcement. They should answer to their employers, i.e. the public. We do this via democracy (because we cannot think of a better way to do it at the moment).

We do not, and should not, employ the railways; it was precisely that mindset that led to the "common carrier" designation and the hampering of the rail companies from the very beginning.

Do you see the difference?


Anonymous said...

DK: The roads and railways are over-capacity, what competition there is is not sufficient, and as I say they cannot be allowed to fail which kind of destroys the competition argument by itself. The usual rules do not apply, people do and will always depend upon them.

That's not to mention the fact that the rails are THEIRS, you can't give them away, it is theft.

I find it bizarre when people claim that different parts of the rail network are competing with one-another. The fact that one can find an obscure example of potential rivalry, does not a vibrant market make. If you have railways "competing" for franchises they are competing (see bribing) to the please the government - yeuch!

Bishop Brennan said...

In any case, yardstick competition(used by the water regulator) could handle the railways monopoly issue - individual franchises can be compared to others, and 'rewarded' appropriately. Although, as in water, no doubt the EU and some pathetic equivalent to the Environment Agency would insist on new rules which push up costs for no good reason.... :-(

Devil's Kitchen said...


"That's not to mention the fact that the rails are THEIRS, you can't give them away, it is theft."

How do you work that one? The railways were built by private companies which were deliberately crippled by the government and whose assets were then pillaged and then, in large part, destroyed.

If the rails belong to the people, then they owe the shareholders of the companies who built them billions of pounds in compensation.

As for your reasoning why we should maintain a state monopoly on rail... Well, words fail me, frankly.

BT have a near monopoly on phone and internet networks—do you favour renationalising BT? You know, to give the people control over that network? Because, unlike with travel, there are no other viable routes (Virgin Media covers a fraction of the country and are, in any case, another monopoly—do you want to nationalise Virgin Media? You know, so that the people can have a say over the fibre network?).

Fucking hellski...


Devil's Kitchen said...

P.S. "I find it bizarre when people claim that different parts of the rail network are competing with one-another."

I find it bizarre when people decide to attack a positon when they have no idea of the history of the subject they are talking about.

The Big Four rail companies, for instance, competed against one another for passengers. GNER would urge people to holiday in Scotland, whilst GWR tried to encourage them to go to Cornwall, for instance.

They competed against each other, and not for government franchises.

Now, please, do go and read about the subject, will you?


P.S. I look forward to your post advocating the nationalisation of BT and Virgin Media.

Anonymous said...

DK: Yessss, I thought so, you've not actually read a shitting thing I've written. Bye!

Devil's Kitchen said...

P.P.S. Who said anything about giving away the rails? How about selling them?


Devil's Kitchen said...


"DK: Yessss, I thought so, you've not actually read a shitting thing I've written. Bye!"

Yes, I have. I have addressed—and comprehensively demolished—every single point that you have raised.

I'm sorry if that gives you the hump, but if I were you I'd get used to it. If the above is a sample of the quality of your knowledge and ability to argue a point then you are going to have your arse handed to you quite a lot. that's life.

Get used to it.


Devil's Kitchen said...

P.S. If you think that I haven't grasped your point, how about writing more coherently?


Devil's Kitchen said...

P.P.S. If you are referring to this...

"Telecoms (BT) was a similar situation but we are being saved by radio/satellite etc (not the pretend landline competition), the same won't be happening for transport."

So, roads don't have the capacity, OK. Do you seriously think that satellite does? No.

Or do you think that, because the satellite company is private, that capacity is going to magically appear?

And if you privatised the travel networks...?


Anonymous said...

Alright I'm back after all...

I am throwing tidbits without explaining, this is true. I write far too many essays on blogs.

On telecoms there is effective competition between satellite/radio/landline, or potentially at least (there are cartels at work).

I am aware of rail history, here and elsewhere, it is the history of monopolist "rent-seekers" who know a monopolistic opportunity when they see one; they have always understood that the railways are a potential (I should say) geographic (not natural) monopoly for them, hence the enthusiastic rail-building.

When you call for a private franchise or hand-over you are calling for feudalism/state capitalism/corporatism (take your pick) because central government is the employer (shareholders are a smokescreen here, they have no responsibility when it fails). I'm saying that: yes, the travelling public should be employers (and responsible therefore) in as direct a way as possible for the railway they use/work on. 'tis stakeholder democracy, as opposed to state capitalism.

On the ownership thing, if it's not our railway then it is the government's railway (even if nicked) which means it's our railway. Either way the travelling public paid for it.

"plurality" won't excuse you from every debate, what would you do with the railways? And bear in mind that you'll never get plurality by asking for people to bid for a franchise fiefdom, you'll only get a bunch of PLCs. Come onnn!! ;D

As above, you are arguing for state capitalism.

Roger Thornhill said...


Plurality is NOT an "excuse".

I think I made it very clear that I recognised that railways were not an easy nut to crack. Hence my outlining various similar but not totally usable methods used elsewhere such as BT and London Buses. The BT Wholesale model gave us "Railtrack" and that did not really work.

I'd rather try and find more alternatives before capitulating and recreating a State monopoly.

Anonymous said...

RT: But you are happy for the State to decide the formula and retain ultimate control, rather than the local people?

Anonymous said...

Isn't it strange ... every time I hear the phrase "rent-seeking" I hear "natural monopoly" and "local democratic control".

Oh and I really like "it's our railway"

It's also not in the least surprising that Ghandi looks to Patrick Vessey for economic enlightenment.

Devil's Kitchen said...


"Either way the travelling public paid for it."

The public paid for the telecoms network too. And the power network. So what?

"When you call for a private franchise or hand-over you are calling for feudalism/state capitalism/corporatism (take your pick) because central government is the employer (shareholders are a smokescreen here, they have no responsibility when it fails)."

That is only assuming that the state steps in when it fails.

I don't believe that this is necessary. As with any other business, when it fails the assets are picked up by other organisations.

Now, if you are asserting that the railways are too important to fail, then fine. But, as I tried to point out, I think that you are wrong.

As I have also pointed out, the railways have never been allowed to operate as a truly private company: we should give it a shot.

"I'm saying that: yes, the travelling public should be employers (and responsible therefore) in as direct a way as possible for the railway they use/work on. 'tis stakeholder democracy, as opposed to state capitalism."

Why not let the computer-using public run all computer companies? Or, as I said, run the telecoms?

"On telecoms there is effective competition between satellite/radio/landline, or potentially at least (there are cartels at work)."


There is no more competition on the actual network than there is between road, rail and air travel.

The land networks are owned either by BT or by Virgin Media: there are no other land networks.

Satellite/radio simply doesn't have the capacity/bandwidth to cope with a wholesale switch (in the same way as you assert is the case for the roads) and that is owned by one corporation in any case.

So, remind me again: what is the difference between telecoms and rail? Why is rail an essential that must be state-owned, when telecoms is not?


Anonymous said...

OK, I see, so we are clear. This is a slagging match where whoever calls the other a Statist the loudest wins, regardless of facts. Therefore...


Anonymous said...


If I own a field outside of beautiful rural village with some lovely local shops can I sell it Tescos? Or is that subject to local democratic control?

What about if want build some low cost dense housing on land - is that subject to local democratic control?

Suppose I have long established organic brewery nestling in the bosom of a rural community – suppose I (the owner) decide that I'm not making enough wonga – can I move it to the city and turn it into an industrial scale meth lab is that subject to local democratic control?

What about the coal fields? The oil? subject to local democratic control?

Other resources? People?

Anonymous said...

"The public paid for the telecoms network too. And the power network"

No they didn't - at least not the power network. It was looted from private hands. List of pre-nationalisation UK electric power companies

Anonymous said...

Btw, I'm guessing power's another natural monoply subject to local democratic control?

Anonymous said...

I am trying to stay off this thread, but something keeps bring me back...

davidncl: please read my comments if you're going to start doing that "local democratic control" thing. I am not arguing for social democracy, I am arguing for the best way to keep the government out: fully out, genuinely out, and permanently out of the railways. People are misunderstanding and/or setting up straw men.

DK: whether there can be/is competition is a question of degrees, I make the judgement that there is plenty of capacity for competition in telecoms, but with the caveat that there's a lot of intervention and quiet cartelisation going on. I get my Internet, phone, and TV over the mobile network, there are multiple parallel infrastructures providing the exact same service, that's good enough for me. The situation might change at some point, if the capacity is absolutely saturated with no possible alternatives in sight then competition will mean nothing.

Bishop Brennan said...


Local democratic control won't work because of time inconsistency problems - any kind of democratic system can always renegotiate or abandon previous contracts, so no-one would be willing / able to make the kind of sunk cost investments needed for railways, or for that matter most utilities, unless they got their money back almost immediately (hence making it unaffordable for consumers).

Hence the idea of independent regulators.

State-ownership, public ownership, whatever you want to call it - it's been tried and it doesn't work. There are a number of reasons, but the primary ones are under-investment and capture by unionised workforces. No amount of local democratic control can solve that.

Equally, I think DK is wrong to think about monopolies in the literal sense - it is enough for a company to exert market power, perhaps in an oligopolistic market, for it to earn significant economic rents and / or insulate itself from competitive pressures (some people will always feel / be bound to use the railways, whether for cost or other reasons).

Personally, I think the rail privatisation was cocked up because they split track from trains and stations. I would have created regional monopolies, franchised them for 25 years, and forced them to allow other train companies to use their tracks under 'essential facilities' doctrine (which would, for example, prevent them limiting that access to only unsocial hours).

I would then use an economic regulator, with yardstick competition, an RPI-x system and rights to audit capital investment (to prevent 'gold-plating').

You can call me a statist if you want, but, whilst I would abolish vast swathes of the state, this is one function that I think is needed to make 'natural' monopoly markets work more effectively to the benefit of everyone, consumers and producers (who should be pressured to get costs down, perhaps more than current regulators do).

And local democratic control would just leave us all at the mercy of the local nutters and busybodies - almost as bad as Westminster. No thanks! Fine for non-economic things like the criminal justice system (elected judges, prosecuters, police chiefs), planning decisions, maybe providing a welfare safety net (NB very minimal), etc. But most people know fuck-all about economics, and would drive the rest of us into the poorhouse with socialist nonsense.

Anonymous said...

To anyone who can actually read and for the umpteenth time:

I want the state out of the railways altogether, my position is that I am the only person on this thread who understands what is required to get the state out of the railways.

And democracy does not always mean the State, by "democracy" in this context I mean to describe the specifics of the organisational structure/ownership of an entirely independent and private company, for want of a better word a co-operative. It is democratic because it is collectively owned: by its actual owners, by which I intend to mean the people who use the railway, not the fucking government local or otherwise.

Must I draw a picture?

Anonymous said...

Thanks for your temperate comments in response to my provocative and somewhat mean spirtied remarks.
“2Must I draw a picture?” you say.
Yes. Because this statement:
“It is democratic because it is collectively owned: by its actual owners, by which I intend to mean the people who use the railway, not the fucking government local or otherwise.”
is weird. How do you suppose the the people who use the railways become owners? Have they bought stock? All of them? In what sense are the users owners?

Anonymous said...

davidncl: if we are in the situation where the government has ownership, I expect them to hand over the land/fixed infrastructure gratis, to some kind of local mutual/collective ownership. Where it goes from there...

Anonymous said...

...I also expect other government/corporate franchise models to fail over time and fail to find 100% private capital bailouts, sooo.

Bishop Brennan said...

But why will such a group of users (who will vary all the time - how you demarcate voting rights, etc. is beyond me; will commuters have more rights than tourists or those who use the railway at weekends?) be any better at running a railway?

How would they finance their capital costs? What bank or financial market would lend to such a bunch of people? What makes you think that they wouldn't all want a state bail-out at some stage, after they drop rail fares (as it's in their interest - why pay for long-term costs when they might not be using the railway in x years' time anyway)?

The reality is that railways are not particularly economic - but are the only way to transport commuters into cities. You'd be better off providing bus / coach services between cities and in rural areas, and restricting trains to mostly commuting times in cities (just look at how empty they tend to be at other times of day).

Otherwise, some level of subsidy from taxation is inevitable. The question is: what should be subsidised, and what should be left to individuals to pay? And from what / whom should the taxes be raised? Or should we stop commuting?

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