The Rail industry.

Rail industry Investigation:



General reading:

- The govt is in the process of renationalising the railways. This might be inspired by the European and Swiss models.

- High performing systems have common characteristics. The time table is seen as the core product, infastructure spending is planned on a multi decade base,

- Govt funding for rail was £11.9bn in 2024/25, accounting for about 46% of total rail income

- The amount of subsidies given to the natural monopoly was above pre-pandemic level

- Rail fares have risen by 5.1% this year, and the revenue gained has increased by 12bn from apr 24 to march 25.

- In 2023, parts of the railway industry was brought back in the public sectors hand due to repeated service failures...


Why do we Economists care about rail?

  • Labour mobility - the UK is known for a low geographical mobility especially when it comes to London vs other parts of the country
  • Potential externalities? Reducing pollution?


The current (though expiring) set-up of the UK railways. 

  1. TOCs (Train operating companies)
    •  Private companies contracted to run passenger services on the national rail network. These are under
  1. ROSCO:
    • Private firms that own trains and lease them to TOCs.
    • 3 dominate the market- generate profits even as the networks is heavily subsidised
  1. Network Rail,
    • government owned infrastructure manager responsible for tracks, signalling and major stations. It reinvests income into the rail network.

  • Open Access Operators

    • A company that operates services using track access rights but without a state contract, taking full revenue risk.


Competition for the market--->

  • Privatisation hoped that TOCs bidding for franchises would create dynamic competition and efficiency gains. But this didnt rally happen...

Contestability

  • What they did was to add open access services, to provide some actual market competition on selected routes, though formally limited.

But we know that the natural monopoly has a flaw:

  • Rail infrastructure is a natural monopoly because high fixed costs and indivisibilities (tracks, signalling, stations) make multiple competing track owners inefficient.

  • Competition was mostly in bidding stages, not in daily operations.

What the result would look like??

  • Real-term fare increases above inflation and persistent subsidies suggest limited competitive pressure on costs and pricing.

Franchises & operators

  • Many TOCs were owned by the same few parent companies reducing genuine rivalry.

  • Some franchises failed or were taken into public ownership due to poor performance,

  • High fee charged by TOC and also high cancellation rates

  • Principle agent problem??? Instead of satisficing

Open access competition

  • Evidence from the East Coast Main Line suggests that where open access operators compete against incumbents, prices can be lower and passenger growth higher

  • However, open access remains a small share of the network and is not a comprehensive competitive force.

You could argue that there is a rail trilemma lol:
you can’t have all three simultaneously:

  1. high quality, reliable services

  2. Low fare

  3. Minimal subsidies, which we as the taxpayer have to pay BTW,


Sources used:

https://catchingmice.substack.com/p/were-getting-worried-about-great

https://www.youtube.com/watch?v=tvSnvNj9M7Q

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