So, Labour wants to freeze rail fares. All very popular of course, but no indication as to how they would actually fund that. Would they really be so grossly irresponsible and incompetent as to just load that onto general taxation and create more fiscal black holes? Past experience suggests so. But if our railways are not adequately funded they will go bust and the whole network would go down. We cannot let that happen. They are a monopoly and that requires a new approach to funding which protects both the consumer and the taxpayer from profiteering, including the cutting of operational costs that undermine quality of service. Most of us remember the underspending on maintenance that followed the Conservative attempt to privatise the railways in the late 90’s and the horrendous crashes that ensued. That was a failure of regulation. Not the way to do it.
There is in fact a strong case for subsidising rail fares. We want to ensure that the massive investment we have already made and may yet make into this infrastructure is used to optimal extent, and we want to minimise congestion on our roads. That would suggest some sort of cross subsidy between the two with road users picking up the tab. After all not all of us use these services. Why should those who don’t have to subsidise those who do?
Indeed there is also a strong case for ring-fencing the whole of the transport budget. It is just about the only departmental budget that does not necessarily involve any transfer of wealth from rich to poor. Revenues from transport fuel duties and other charges currently amount to c.£24bn whereas departmental expenditure is only £14bn. If the whole of the revenues were given over to that Department and kept quite separate from the Treasury then users and only users would get the full benefit from them including any cross funding and subsidy for the railways. Decisions over road pricing for example could also be left to that department which would become entirely self-funding perhaps through a new National Transport Corporation.
To nationalise or not to nationalise? Is that the question? NO! Absolutely not! If you nationalise a capital intensive industry such as our railways all the capital costs of modernisation and expansion, tens of billions of pounds’ worth (look at HS2) will fall onto the shoulders of the taxpayer. Most of us want to see taxation below 30% GDP in the belief that will enhance economic growth, which is not an unreasonable target given it was 33% (plus fiscal deficit) before Covid. Now it is around 38% with a massive 6% GDP deficit on top. The taxpayer simply cannot afford that sort of expenditure. It has to come from the City.
But to attract funding from the city requires profits. One thing I have noticed over the years is just how risk averse institutional investors can be. Safety and guarantees against loss are just as if not more important to them that exceptional profits. This would suggest cap and collar profit regulation with a collar at say 2.5% profit before tax and a cap at 7.5%. Or maybe lower if experience shows funding can be raised without underwriting at these levels. If profits come out above the cap the regulator would require fare cuts to bring profits back to the centre of the range, other things being equal , and HMRC would claw back the excess profits.. That still leaves shareholders with an incentive to rebuild profits back up to the cap through greater efficiency. However if profits fall below the collar the regulator will allow corresponding increases or, line by line or service by service, closure if fare increases reduce turnover still further. HMRC could refund profit shortfalls, charging the amount to the Department of Transport.
Reintegration of the railways does not imply nationalisation. Splitting the service up into lots of local operators has just created lots of little monopolies, and in any case the franchise system was always going to be inappropriate to such a capital intensive industry which requires large long-term capital investment. Franchising is fine if you running chain of burger bars, but not here. That said I have no objection to private operators buying in perpetuity rights to slots in a national timetable set by Network Rail with a secondary market allowing them to be bought and sold. A substantial service charge from Network Rail (subject to regulation) would ensure they are only kept if they can be made profitable, and that would allow new operators to enter the market where existing supply is insufficient or inefficient. The fact that this has not happened much in practice is again a failure of both organisation and regulation which focuses on comparisons with general inflation rather than profitability.
But we are still left with three problems:
1. How to fund and allocate subsidies to ensure an optimal balance between, and utilisation of, road and rail services.
2. How to set fares locally so they reflect local levels of demand, and
3. How to allocate capital expenditure to where demand is greatest.
It is important that any subsidy system promotes incentives to maximise turnover. Turnover is maximised by satisfying the right combination of consumer demand on price, availability and quality of service. Only the price mechanism, driven by the purchase decision, can provide this. Look at the NHS by comparison. Generally high on quality of service, but hopeless on both availability and efficiency, and the same is true of all other public services.
I therefore recommend a general and uniform turnover percentage uplift subsidy across the industry to replace all other forms of subsidy, but leaving open the option for local authorities and others to add their own percentages for local services if they wish. It should also replace the train drivers wage subsidy, (but I digress!). Indeed, to digress further, any losses such as passenger refunds and other losses directly attributable to strike action should be recharged to the Unions. A good employer does not underpay his staff. If you do you will lose them and the best will go first. In the private sector we judge this by looking at staff turnover rates and recruitment response rates, and the public sector should do the same. This is not something that can be done through national wage bargaining. It has to be done locally because the ‘rate for the job’ will vary across different skills, in different locations and at different levels of experience. The same is true in setting rail fares. Thus some services will produce profits in excess of the cap and other losses below it. The regulator would only alter the national subsidy level if total profits fell outside the limits, but may require fare reductions on specific services. The national subsidy would be set so that a small number of services do close each year.
The Regulator must also take an interest in whether sufficient expenditure is being spent on maintenance and safety, and approve capital expenditure plans to ensure they reflect local patterns of actual consumer demand and well as safety requirements. Network Rail would issue just enough new shares each year to fund approved capital expenditure programmes so we would see a gradual re-privatisation over a number of years rather than the dramatic ‘Tell Sid’ exercises favoured by Margaret Thatcher which invariably undersold taxpayer assets.
Indeed the Cap and Collar Profit Regulation model should be rolled out for all our monopoly utilities. The Water industry is another pressing example. And essential multi-supplier services such as farming and care homes would also benefit from the national turnover subsidy with cap and collar profit regulation model but with no need for price regulation because there is sufficient competition.
But don’t hold your breath. Do I see these ideas in any of the party manifestos? No I don’t. They all seem more interested in campaigning than policy.
John Poynton 