Northern rail: economies of scale show steady nationalisation makes sense

The question of whether or not the government should renationalise the UK’s railways has been raised again after the troubled rail company Northern had its franchise cancelled. In March, the franchise will revert to government control through the Department for Transport’s aptly named “operator of last resort”. Nationalisation has always been instinctively viewed with suspicion by those on the right but there are sound economic reasons to believe a renationalised railway would operate more efficiently.

Northern was operated by the failing German transport giant Arriva, which had another five years left on its franchise agreement before it was asked to hand in the keys. Northern had already been given a yellow card for its persistent problems of punctuality and unacceptable record of cancellations. Statistics from the Office of Rail and Road make grim reading. They show that only 52.5% of services arrived at their destination on time between April 2018 and March 2019 – a fall of 12.8% on the previous period. The figures also show that 3.8% of trains were cancelled – double the industry average.

To be fair to Northern, many of the delays were caused by Network Rail’s failings and the knock-on effects from delays caused by other train operating companies. What is not acceptable is that many delays were caused by driver shortages, strikes, rolling stock problems and the introduction of a new timetable. All of these could and should have been avoided.

So Northern will be nationalised in all but name. Its new incarnation, Northern Trains Ltd, will operate on the same basis as London North Eastern Railway (LNER), which took over when Virgin Trains pulled out of the East Coast Main Line franchise in May 2018.

The privatisation of the UK’s railways has been fraught with problems. In the mid-1980s, Margaret Thatcher and her arch-privatiser, Nicholas Ridley, said it couldn’t be done. They called it “a privatisation too far”. The John Major government adopted the model proposed by the Adam Smith Institute, separating ownership of the track from operating passenger services. This model is being increasingly criticised.

These are some of the issues that are currently being investigated by the Williams Rail Review. I doubt this report will call for wholesale renationalisation (as favoured by the trade unions and many academics). This is too much to expect and will not be acceptable to a Conservative government. But the return to public ownership is not impossible. When the short existing franchises finish, the government could take them back into public ownership at little or no cost to tax payers.

Economies of scale

As an economist, I keep reminding myself, and my students, that a rail system is what we call a “natural monopoly”. This is the powerful case for having a single operator for the track and all services. It is based on the assumption that there are benefits from economies of scale – the term used in economics to explain how average costs fall in the long run as the scale of what is being produced increases.

For railways, it could mean good deals on new rolling stock, especially where this can be standardised (as low cost airlines have pursued with their use of Boeing 737s). Substantial discounts could also be made when purchasing fuel and the thousands of other things needed to run a well managed railway system.

In principle, suppliers could ill-afford to not offer discounts. The economies of scale therefore are so great that having just one operator is more “natural”. With falling long-run average costs and more services operating on a given network due to growing passenger numbers, the minimum efficient size is so large that it makes eminent sense to have just one company running trains and providing infrastructure. Any competition, involving the duplication of services and investment would be an inefficient use of resources, as my own research has shown.

This is what the transport unions crave. But, in the current political climate, they are not going to get it. What is more realistic is to gradually reduce the number of train operating companies from the 28 of today to say three or four, each having a regional franchise. Network Rail would be retained as the track authority although there is support for the regional companies also managing the infrastructure.

Handing over Northern’s services to the operator of last resort is of course different – more a case of renationalisation through the back door. So, what can passengers expect? Train crews, station staff and most managers will remain but they will be employed by Northern Trains Ltd (in LNER’s case even the MD remained). The brand will remain and staff will wear the same uniforms. Unlike LNER, the fleet is not expected to get a respray (no point in giving those old remaining Pacers a lick of paint).

But will passengers benefit? After all, this has been the driving force for change. The new trains will be rolled out and hopefully there will be fewer delays and cancellations. It won’t be a quick fix but hopefully it will be better for the millions “up north” who will continue to rely on Northern’s services. Let’s face it, it cannot get any worse.

Want to write?

Write an article and join a growing community of more than 97,000 academics and researchers from 3,134 institutions.

Register now