Tuesday 20 March 2012

What's rail privatisation got to do with the NHS?

With the health and social care bill going through parliament, some commentators have likened the changes in the NHS with the privatisation of the railways under John Major in 1993. Besides the strange logic of this analogy, the argument put forward for the privatisation of the railways made much about railways competing for customers (or passengers) and this argument is now widely regarded as lost. So why can railways not compete against each other? And if this is so, is the privatisation of any public service bound to fail? 
The main case against railway competition rests on a specific understanding of the nature of the service offered and the way in which it is consumed. Railways require the use of tracks and hence, where they compete for passengers, they must use the same resource. Since they cannot use the same track simultaneously, competition can only occur where people are on non-essential journeys. This narrows the chances for genuine competition between railway operators significantly. No passenger commuting for work between Bristol and London can effectively delay her journey until the next train arrives which may be cheaper. 
But the issue on which competition between railways really falls down is price. Railways gain the approval to run trains on particular lines through franchises which are granted by the government. Nothing stops the government to grant two or more licenses for the same line in certain areas, say between Birmingham and London. Theoretically, train operators could compete for passengers by offering lower prices than any other providers for this section of the line. Why dont they? 
There are lines where two independent rail companies do operate services, London Victoria to Gatwick Airport is one of them. Now franchises explicitly prohibit railways to cross-finance operating costs, so they cannot, say run a line between London and Birmingham on a profit and transfer the profits of this line to offer prices below operating costs on another line. This means that bidding wars (such as the Murdoch price wars in the British press in the 1990s) are ruled out. 
Yet the railway system is also set up in such a way that even genuine price competition between operators on the same lines do not translate into lower fares. The Gatwick line is a good example. Despite the choice passengers have between two different train companies, both only offer (roughly) similar prices for the same route and distance, which are incidentally higher than for other comparable routes. Why is that? 
The reason is that choice is a blunt instrument for price competition once you do not allow providers to cross finance losses. Both operators on the Gatwick route know that passengers have no other option than to take one or the other operator. Journeys to Gatwick Airport are ‘essential journeys’ given the lack of alternative transport options. This means that, once the lowest ceiling is set through the franchise and the ban on cross-financing, both operators can safely cash in on whoever needs to get from London to Gatwick Airport (and back). 
In other words, the chances are stacked against genuine choice due to the very nature of rail transport. And so railway competition as a means to drive fare prices down is unlikely to succeed. This does not however mean that privatisation is wrong or that it would not have an effect on the costs of running railways. What the privatisation of railways did achieve in the UK is that the railways are run far more efficiently now than they used to. So, privatisation does have a positive effect, just not the one politicians often want it to have, leading to lower fares through direct competition for business. 
It is interesting that in the public debate the two things are often mixed up. Privatisation is taken to have failed since competition between train operators cannot occur to lead to lower fare prices. Yet privatisation is not just about competition, often more importantly it is about driving out inefficiencies that creep into any publicly run organisation funded through a guarantee of government funding. 
This is where the case for railway privatisation is relevant to the NHS bill. While competition on price between providers is highly unlikely to have the desired effect (of cutting health costs), running a large organisation as an efficient business drives down costs where publicly funded organisations are more likely to waste money.
Incidentally, this is what Tony Blair’s government recognised by pushing most NHS Hospitals into independent trusts that had to stay within their budget. And this is behind the recent warning of the Welsh health minister that trusts in the Welsh NHS that rake up significant losses wont be bailed out. The question is what works: wagging the finger at large public organisations or introducing effective drivers for change. I’m all for the latter. 

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