Be informed

Back in the 1990s I a wrote a PhD thesis. It was about railways. The privatisation of the UK rail system. Actually, it was two theses. The first part was about privatisation; the second, contrasting part, was about the Beeching years where the network was significantly reduced. Anyone wanting to read it can do so here.

The UK passenger rail industry was privatised using a franching model. The infrastructure management was separated from the provision of train services. Contrived competition came as a result of competition for 7-year franchises, not between trains running over the same track. However, there was to be limited “open access” whereby new operators could have rights over train paths in competition with franchise holders. Out of that provision came Hull Trains (now owned by FirstGroup) and Grand Central (Deutsche Bahn) linking towns and cities that were essentially cut from the Intercity services on privatisation. These open access services have been, arguably, some of the successes of rail privatisation.

I remember at the time the “blame” for privatisation by advocates as coming from the EU. It was true, back in 1991, the EU required national rail operators – largely state-owned providers – to account for infrastructure separately to train services. All in the name of transparency, seemingly. What the EU did not require was wholesale route or infrastructure privatisation. The UK got both; though after a spate of accidents, the privatised infrastructure provider, Railtrack, collapsed and the assets were re-nationalised. The rest is history.

It would seem, however, that the EU’s intention was, after all, to force national operators to liberalise their services and, by implication, allow competitors access to all routes, not just the minor ones as is common at the moment. In Bavaria, for example, Transdev, the French multinational, has run the BayrisheOberlandBahn (BOB, left) under this limited franchising model since 1998. Deutsche Bahn bought Arriva in 2010 but had to sell its German Arriva rail franchises to comply with EU competition policy.

The current European scenario is familiar to British rail observers. In Germany the new operators may well be major coach operators. Now coach operation is a relatively new thing in Germany. Who needs a national coach network when there is a comprehensive national rail network with connecting buses to non-connected locations? Well, one was created and, as might be anticipated, there was a flurry of new operators which, over not very much time, consolidated into a new dominant operator. In particular, I point to Flixbus. In the UK it was Stagecoach, FirstBus and GoAhead leading the bus-to-rail charge.

Flixbus was founded in 2013, has three main backers (General Atlantic, Holtzbrinck Ventures and Silver Lake Partners) and operates throughout Europe and in the United States. Taking on Deutsche Bahn is an interesting diversification. Another entrant is thought to be Leo Express, a Prague-based start-up. But more interesting is perhaps competition from other state operators. In Germany, for example, we might expect the French national operator, SNCF, Dutch national railways (Nederlandse Spoorwegen), Trenitalia and Spain’s RENFE to enter?

The EU’s position seems to be championing of customers. The argument goes something like this:

• rail travel is too expensive across Europe;
• monopoly providers keep fares artificially high due to producer interests at the expense of passengers;
• more competition leads to lower fares.

Lower fares have implications. In this case, as has been seen in the UK, national operators subsidise their existing operations by taking on potentially lucrative operations in other countries. In the UK, services run by Deutsche Bahn/Arriva and Dutch state railways (Abellio/Nederlandse Spoorwegen) qualify in this respect.

Cheerleading this nonsense, as ever, is the Economist. Take the case of the Czech Republic: “new operators have achieved costs per seat kilometre that are 30-50% lower than those of the state operator. Passengers are benefiting: the average ticket price from Prague to Ostrava has fallen by 61% since 2011, when the state rail firm lost its monopoly.” The Economist notes also that it leads to greater yield pricing similar to what airlines use. The closer to time of travel – or on particularly-known busy times – prices go up to choke off demand. Great! OK, the opposite is also true, fares go down at quieter times. But trains are not like planes; people use them because they have to and have limited flexibility. Rail has a social purpose, planes, largely not. Innovation is not what is needed per se. Reliability is what is needed.

The Economist goes on. Nederlandse Spoorwegen carry more passengers in the UK than in the Netherlands!  Scotrail had to be bailed out by its parent, Deutsche Bahn, to the tune of £10m, presumably making services in Germany even less-well funded? Liberalisation and privatisation fracture national networks and reduces network effects (the Germans already know about declining network benefits; British passengers have understood this since privatisation).

The Economist then highlights what it knows about such firms when put under pressure. Surprisingly they use their control and knowledge over the infrastructure to gain an advantage. They collude. They even sever track across borders (Lithuanian Railways on rail link with neighbouring Latvia – detailed in the Economist article).

Let us finish on Economist optimism: “And the high costs involved in starting a new railway firm mean that it will take time for the full benefits of competition to be felt by EU passengers, says Lorenzo Casullo of the OECD, a think-tank. Europe’s railways are on a long journey, but commuters will surely be better off down the line.” Same old, same old.

Economist article published 30 June 2018

Photos: Flixbus: Florian Fèvre