British rail privatisation failed because although the industry was privatised it was not liberated.  There was still a great deal of government interference.  The most damaging aspects of that interference were:

• Vertical fragmentation
• Contracting out, or franchising as it is known
• Fare control
• Higher costs imposed by the Health and Safety Executive and others in the name of safety. 

So, what was wrong with franchising?

What was right with it?  For starters the franchises were too short.  Rail is a capital intensive industry.  Trains, tracks, signalling and stations have to last a long time.  For a franchisee on a five-year contract there is no point in building a station that is not going to show a return until Year 6.

In that case surely the answer was to have longer franchises?

There are a couple of problems with this:

• There is still an end which means you have all the same problems with franchisees being unwilling to invest near the end of the franchise.
• Lock-in.  If the contract is badly drawn up - so that the franchisee has all sorts of bad incentives then it can take a long time to sort it out.  Sure, you can re-negotiate the contract but this can prove an expensive business.  And anyway, even a renegotiated contract is likely to be badly drawn up.

Why’s that?

Because the state is incompetent (See Freer is Better).  If the state is incompetent when it comes to owning, regulating or procuring it is unlikely to be much better when it comes to drawing up contracts.

You mentioned increased safety costs.  Can you give some examples?

• It took longer to get trains into service
• Longer (and more expensive) accident enquries.  Ladbroke Grove took two years.  Compare it with this example from 1961.
• Here’s a minor one: safety regulations making it too expensive to fix a leaking roof.

But don’t you need these safety regulations?

I don’t think so.

You argue that freer is better.  But surely even with the many restrictions the “privatised” railways were freer than the nationalised one.  And also worse.  Doesn’t this at least show that freer is not always better?

Hmm.  I’m not quite sure how to answer that.  If I accept that after privatisation things got worse, which I do, then I either have to accept that freer is not always better or argue that BR was in fact freer than the privatised railway.  I think I am going to argue the latter.  Although the state could and did interfere in all sorts of aspects of the railways by and large they didn’t.  This was especially true in the Thatcher years.  The key restrictions were in the areas of: fare control, line closures and borrowing.

With privatisation, the only real restriction to be lifted was the one on borrowing.  There was still plenty of fare control and I can’t remember the last time a line was closed.  But there were also a whole new bunch of restrictions introduced (see above).  I would argue that these were actually worse than what went before.

What’s the story with fare control?

In the initial stages of British rail privatisation some fares were controlled and some weren’t. Commuter fares, in particular, were held to an inflation minus a percentage formula.  This was much more severe than the horse trading that had typically carried on under nationalisation. As usual, the laws of supply and demand kicked in and demand rocketed. The result: massive overcrowding.

But isn’t fare control essential?

I don’t think so.

So, what should be done then?

We should liberate the railways (warning: gappy)

Permalink • Rail • Last Updated: 24 September 2006

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