Chip Shop Economics: Part 1 – The Railways

Not strictly relevant to the Manchester MBA but welcome to the first installment of an irregular series of blog posts where I give my (admittedly ill-informed) thoughts on one of the economic issues of the day.

These posts are not meant to be an in depth analysis of the issue at hand, nor do they necessarily represent the exact views of the author.They have not been thought through to a final conclusion, they are merely are an attempt to throw a curve ball at a subject that all too often is over-complicated by professional economists.First up is the thorny topic of the UK’s rail system. Those of you who aren’t based over here may be aware of the shambles of the West Coast mainline franchise bidding process. The affair is symptomatic of an tendering and operating system that is as dysfunctional as uncle Ron and auntie Jean after the Christmas sherry.

All aboard the big train

All Aboard….

Whilst it can’t be denied that privatisation has brought a better service to some lines (ironically the West Coast mainline being among the best performers), taking a train with certain rail companies will transport you back to the worst days of British Rail – delays, over-crowding, blocked toilets and non-existent refreshment facilities.

Ultimately, the issue is a lack of true competition. Companies that are successful in winning a rail franchise essentially score a publicly subsidised monopoly that they can exploit to their hearts delight. If you want to take a train from Bristol to London, for example, you have no choice but to use First Great Western. Whilst fare increases are regulated somewhat by the government, the incentives in the system mean that companies pare back operating costs as low as they can get away with whilst still trousering government subsidies (net £2.7 billion per year at last count) which funnel back directly to shareholders. Even if the unthinkable happens and their second-rate service means they lose their franchise at the next tender stage, as their costs are pretty much all variable (rolling stock is rented) they can still walk away into the sunset with their ill-gotten gains.

So how do we redress this imbalance?

Solution 1: Give customers a real choice by introducing competition on a line by line basis. Trains currently leave Manchester for London every twenty minutes. Why not make train companies bid per time slot in a similar model to airlines? This would make it very easy for travelers to pick one company over another thus giving the firms proper incentives to deliver lowest prices / best services.

Critics may argue that train companies will not be able to make any money on this system but the fact remains that their current profits are subsidised by the taxpayer now anyway. This change of system would just mean the subsidies would be bid down to the true market level and the customer would benefit from improved services / pricing. If it truly is the case that a competitive system can’t be made to work then perhaps the railways should not be in private hands and we should move to a system such as the one outlined below:

Solution 2: Take the railways back into public ownership but give the new operating company real motivation to perform. The classic public sector criticism is that with no profit motive there is no incentive for government agencies to deliver the best possible service. With a creative use of a carrot and stick this needn’t necessarily be the case. Imagine if you will, a model of train services whereby the great and the good of British Rail Mark II are not driven by nebulous notions of public service but by their own desire to maximise their earnings. Imagine that a significant proportion of their pay is linked to the continuing good performance of the rail system, a measure determined by traditional metrics such as punctuality and reliability but also by concepts such as safety and customer satisfaction (as monitored by external agents). Further imagine that this approach is not exclusive to senior management remuneration. Everyone, from the cleaner through the station masters up to the train drivers themselves would be bonused on the overall performance of their section of the network. This would give every employee a stake in success. Prices could then be set in the best interests of society (whether that be at the natural market clearing rate or reduced to allow affordable travel for all). Sure, this would require government subsidy but we are doing that anyway so it should be an easy pill to swallow.

Right, first chip shop rant over. Who’s for gravy?

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