Economic analysis exposes the ultimate flaw in the present arrangement for railways

Sir, John Kay’s very positive portrayal of the benefits of rail privatisation (August 19) is incorrect on three counts.

First, the demand for rail transport is a derived demand of economic growth in an economy as a whole. Rail patronage has risen substantially since 1995, but the economy is also 60 per cent larger in real terms (even with the 2007-08 crash). Had he reviewed British Rail’s passenger numbers, he would have noticed that the revival of the industry began in the mid-1980s as the Lawson Boom gave rise to a greater need for transport services. Passenger numbers fell in the recession of the early 1990s, and then rose substantially as the economy returned to growth. Using 1995 as a reference point, at the start of 14 long years of expansion in gross domestic product, is misleading.

He also misses the raison d’être of rail privatisation, and why we suspect so many Conservative voters support the policy. In a cross-departmental paper outlining options for rail privatisation published in 1992, New Opportunities for the Railways emphasised the view of HM Treasury that the option chosen must not include a perpetual public subsidy — the same subsidy that British Rail reduced in the late 1980s following its business sector-led reorganisation, reaching an all-time historic low in 1990-91. To take accounting year 2007-08, the public subsidy to the industry was three times as much (in real terms) as that received in the last full year of British Rail management. Privatisation has manifestly failed to reduce the railways’ capacity to absorb public money.

Simple economic analysis also exposes the ultimate flaw of the present structure. As the economy has expanded it is true to say the number of people travelling by train has risen; as a consequence average costs per passenger should have fallen drastically, and the public subsidy too. As illustrated by the coalition government’s own report into the problems with our railways, the McNulty report published in 2011, average costs per passenger have risen substantially. This is very unusual, to say the least, in an industry with such vast fixed costs: the marginal cost of carrying one, or even 1,000, extra passengers is close to zero.

Oliver Lewis, London
The Campaign to Bring Back British Rail

The Financial Times, 23 August 2015