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Monday essay: can competition work?

The architects of privatisation in the 1990s wanted railways to be as loosely restrained as possible. Their mantra was ‘the market will provide’. In the first of a new series of essays, Sim Harris argues that the problem is that the market only provides when it can see a profit.

PASSENGERS arriving at airports around the country to catch Flybe flights early on 5 March found to their dismay that their aircraft wouldn’t be taking off.

The airline industry is a fair example of the free market in action. Fares are unregulated, and are only restrained by competition from other airlines or other modes of transport, such as cars and trains.

Flybe presumably had no choice. It was, to use the transport secretary’s description of the Northern rail franchise in January this year, ‘no longer sustainable’.

Unsustainable Northern went to the wall a few weeks later, at least as far as the franchise owner Arriva was concerned. But there was no noticeable difference after the changeover, because the Department for Transport had simply taken back the contract. Trains kept running, station staff came on duty, train crews continued to book on and the depots still hummed with activity each night. It was business at usual.

This was the result of a market which is not free, but regulated. One by-product of such regulation is that it provides protection for users of a service and the staff who are employed to provide it.

The architects of privatisation in the 1990s wanted railways to be as loosely restrained as possible. Their mantra was ‘the market will provide’. The problem is that the market only provides when it can see a profit. All products and services are subject to this test, and let the devil take the hindmost. For example, market pressures have caused the banks to close many of their branches in recent years, and lightly-used bus services which lack council subsidies often disappear.

Very few passenger rail operators make real profits. The franchises rarely do, as we have been discovering lately, and the premiums which some of them pay are the result of creative accounting, because track access charges are massively subsidised by a direct Department for Transport grant at the Network Rail end. Premiums rarely represent real income for the state – they are usually no more than partial repayments of Network Rail’s direct grant.

Open access operators have no safety nets. They have to make ends meet or they cease to exist, as Wrexham & Shropshire did in 2011. But those that make money do so by running an extremely selective timetable, catering only for the greatest flows.

If open access operators are an optional extra the idea can work, within limits. Both Hull Trains and Grand Central have temporarily suspended all their services, but there are still trains to Bradford, Hull and Sunderland. Indeed, although both GC and HT were popular the franchises are still running services, in spite of these difficult times.

Franchises are protected from the effects of open access, by ‘moderation of competition’ rules. For this reason, Wrexham & Shropshire was not allowed to call at Birmingham New Street. If some of Virgin’s revenue had been ‘abstracted’ by W&S at Birmingham, Virgin might have been able to claim compensation under the terms of its franchise contract. Taxpayers would then have been effectively contributing to Wrexham & Shropshire’s revenue.

But if there were no franchises on intercity routes but just a combination of open access operators, it is argued that the free market could demonstrate its strengths. Fares could be pushed down and standards might rise. Passengers would be able to choose. With the future of the structure of the railway industry in the balance, voices are heard supporting exactly this idea.

It is, after all, how the aviation industry works, and most of the time it succeeds. What is the difference between wings and wheels?

Those who argue in favour of replacing rail franchises with competing open access operators on intercity routes ignore several factors.

Without a government-controlled franchise to provide the basis of the timetable, how could any of the competing firms be compelled to operate, say, services after 19.00? Such services might be socially necessary but not necessarily profitable.

If compulsion was used, then the operators involved would surely be able to claim payment from the government. Once again, taxpayers would be subsidising the railway, while the operators would not be true open access at all, but new forms of contractor – without any detailed agreement. 

More tickets would probably be ‘operator specific’, and what would happen to a passenger with a ticket from operator A who wanted to travel during the evening, only to find that all the trains after 19.00 were being run by operator B?

Of course, operator B could be obliged to accept tickets issued by A after a certain time of day, but only by creating further contract conditions. The deal would now be getting steadily more complex, and moving still further away from the ideal of free market open access.

It would be difficult, too, to explain to passengers why operator A’s tickets would be accepted on B’s services after 19.00 each night, but not earlier in the day.

There is already evidence that operator-specific tickets can lead to confusion, even when the bulk of intercity services are provided by franchises.

In one particularly well-reported incident in 2014, a man travelling to London with 38 companions boarded a Virgin Trains service at Birmingham New Street, but was reported to have been ‘fined’ £1,048 when a revenue protection inspector found that the tickets were ‘London Midland only’.

Another difference between wings and wheels is that booking in advance is standard on airlines, and this helps to avoid confusion between different carriers. In any case, the ticket-checking process is more complex at airports, and it seems unlikely that someone with a British Airways ticket would succeed in boarding a Virgin Atlantic flight.

One way of reducing the chances of confusion between intercity operators would be to make reservations compulsory. Virgin published proposals for such a change last year, for submission to the Williams Review.

But the ‘walk-on’ railway is valued in Britain, and to throw it away in exchange for open access operation on intercity routes seems a high price to pay.

The supporters of intercity open-access also do not explain what would happen if one of a route’s operators failed suddenly, as happened to Flybe. The timetable on a busy main line might be shredded by such an event, and who would honour tickets which had been sold in advance by the failed operator? The DfT’s Operator of Last Resort could still step in, but a form of ‘franchise’ might have to be created overnight. It has never been done, and the challenges, both administrative and operational, would be formidable.

This is a revised and abridged version of an essay first published in the Hot Topic series in the current print edition of Railnews, which was published on 2 April. Copies of the complete April edition can be obtained by calling 01438 281200 from UK numbers or +44 (0)1438 281200 internationally, and selecting Option 2.

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