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Is open access the answer to Britain’s railway monopoly problem?

The Economist

The great train debate is not just a minor contretemps between the small-state supporters and scorners. It is one that has implications for millions of people everyday.

You may have read other authors on this site extol the virtues of privatisation of long-distance rail and evidence this by demonstrating how it has improved the train system in Britain. Indeed it has; the frequency of trains on key long-distance routes such as London to Manchester was generally one or fewer per hour under British Rail, now there are three trains per hour on the same route. The current system has delivered laudable results and one of the best safety records in the world.

But some of the worst elements of the nationalised system remain. A single franchise operator can still have monopoly control and the track is still owned by the state. When Jeremy Corbyn got stuck on a train after Labour Party conference, it was the nationalised company that failed to get him home.

Indeed, in many ways we continue to have a nationalised system. One that’s not just prone to failure, but designed to fail. Fail the government, taxpayers, monopoly franchise operators and passengers alike. The government pays a high political price for handing out contracts that fail and takes the flak for services not delivered. Taxpayers who never get on the trains end up subsidising white elephant projects because private companies are locked out of building new track and new lines to meet demand. Train operators get stuck in overspecified contracts that become unprofitable and can drag them into bankruptcy. Passengers don’t get a choice of service, a properly premium option, or the ability to use the market to meet their preferences.

In other words, there is still a lot of room for improvement; privatisation is only transformative in increasing standards because it leads to competition.

Right now, the system we have is an obstacle to increased competition between operators on the same route. There are loss-making routes’ such as Northern Rail, which receives a subsidy from the government or local authorities for delivering services. There are profitable routes, like the West Coast Mainline run by Virgin, which pay a premium to the government agreed prior to the contract being awarded. The premiums often increase over time depending on the projected growth of the franchise.

These franchise terms create entrepreneurial inertia. Premium payments are often so inflexible that there is a culture of risk-aversion and little scope to invest in innovation.

The assumed growth of the operator in the bidding process contributes toward this. As was clear from the early termination of the Virgins Trains East Coast franchise, companies often overestimate their projected profit to win the bid from the government despite attempts to mitigate the risk by requiring bidders to put a bond against any revenue shortfall.

Open access would help solve this. Under an open access system, operators would be allowed to bid for permission to operate on train lines, creating greater competition between operators.

It would allow us to overcome the cheap political point-scoring which perpetuates general distrust relating to the government’s handling of rail — something we know from the record number of escalated complaints to the watchdog. What’s more, bolstered by trade unions’ passionate resistance to change, rail staff are paid generously; the average driver salary is £55,000 a year for 35 hours a week, which is often completed in four days. It is no surprise many are outraged by the unions’ collective bargaining power when it comes at the expense of passengers.

Right now, open access operators are subject to the Not Primarily Abstractive (NPA) test. It’s an opaque name for a simple concept: protectionism. The NPA was created to protect a premium paying monopoly franchise operator’s revenue and stop open access operators cherry-picking lucrative routes. It is an artificial barrier which arbitrarily applies only to open access operators and further encourages risky bidding for franchises. Abolishing the NPA would be a step in the right direction to creating a level playing field between open access and monopoly franchise operators.

Additionally, track access charges are unequal. Parity between the track access charges between both monopoly franchise and open access operators will lessen market distortion and end the commercial inertia which plagues some parts of the industry.

The ultimate aim, however, would be to break apart the covenant of salt between the monopoly franchises and government bureaucracy by replacing the franchise system with an open access system. This would allow the monopoly provider to be replaced with a competitive system of open access operators on the same line. There are many obvious routes where this model would likely prove transformational, such as the West Coast Mainline from London to North West England and Glasgow.

Concerns about open access operators disregarding less profitable lines can comfortably be solved by creating a minimum service obligation of paths that also encompass off-peak services.

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