We should not renationalise the railways

March 4, 2013

Privatisation is often blamed for the shortcomings of Britain’s railways. This is unfair. Genuine privatisation never happened. Nominal ownership may have been transferred to the private sector, but the government remains firmly in control.

Renationalisation would only exacerbate this problem. Politicians and bureaucrats would still make the key decisions on rail – such as today’s announcement that £9.4 billion is to be invested in various loss-making projects. But there would be even less attention given to commercial considerations and even fewer opportunities for entrepreneurship and innovation in the industry.

A far better option would be to move towards proper privatisation. Taxpayer subsidies could be phased out; loss-making lines could be closed; and investment could be restricted to those projects that were profitable. And perhaps most importantly, full privatisation would allow the merger of track and train, ending the disastrous fragmentation of the railways.

Fragmentation is not a market outcome – politicians and officials imposed an artificial structure on the industry. Historically, railways have nearly always been vertically integrated. But the government, influenced by EU policies on open access, has largely ignored this lesson. Different firms now manage the infrastructure, run the trains and own the rolling stock. There is also a complex system of regulatory oversight. This complexity has contributed to an explosion of costs. Following privatisation, subsidies from taxpayers have tripled to about £5 billion a year.

A complex structure is not the only problem facing the sector. The government also makes it extremely difficult for private companies to deliver efficiency gains. It actually became harder to close loss-making lines after privatisation, while service levels are largely determined politically, through the franchising system, rather than on commercial grounds.

The government also maintains price controls, including on key London commuter routes. Private firms are therefore severely limited in their ability to tackle congestion through more flexible fare levels. But they still get blamed for the resulting overcrowding. Worse still, the congestion creates pressure for investment in new capacity – placing a still greater burden on taxpayers.

While private involvement has brought some improvements, for example to marketing, the scope for entrepreneurship remains extremely limited. Indeed, when firms have tried to develop new privately-funded rail infrastructure, they have faced obstacle after obstacle from transport bureaucracies unwilling to cede control.

Rail investment is currently determined in a process not too dissimilar to Soviet central planning, and directed largely to meet political objectives rather than economic ones. As we see today, huge sums are spent on loss-making projects that make no commercial sense, with costs loaded on to taxpayers.

Perhaps the fundamental problem is the strength of the rail lobby, bolstered in some areas by the disproportionate political influence of wealthy rail commuters. Concentrated special interests have been able to extract huge amounts from taxpayers by capturing policy. Renationalisation is unlikely to break the cosy relationship between the rail lobby and policymakers; it will simply lead to more of the same.

16 July 2012, Huffington Post UK

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Privatisation and pricing are the keys to an efficient roads sector

March 4, 2013

Economic crises often lead to big policy changes. Heavily indebted governments seek new funding sources and growth becomes a top priority.

The current slowdown is already having a large impact on transport policy. Cuts in public spending have led to the cancellation of many schemes. Yet investment in transport is desperately needed to bolster economic recovery.

The British government appears to have found a solution. The Prime Minister recently announced plans for the private sector to build and operate new trunk roads and motorways. Under one option being considered, the construction of new capacity would be funded by tolls paid by drivers, while existing roads would be leased by private firms who would receive ‘shadow tolls’ paid by the government. The Treasury would save hundreds of millions per year by no longer funding new road schemes and could also receive a short-term windfall by selling off leases for existing routes.

But the plans fall a long way short of full privatisation. The schemes will be subject to very stringent government supervision, probably along the lines of heavily regulated utility industries such as water. Sadly, this means the entrepreneurship and innovation that makes the genuine private sector so dynamic will be suffocated. The benefits will be a tiny fraction of the gains that a more radical programme of road privatisation would bring. And these benefits are far beyond those that would be achieved by introducing a government-run road pricing system.

Perhaps the most noticeable impact would be a reduction in congestion, which is estimated to cost the UK economy about £20 billion per annum. Private road owners could introduce variable pricing to make sure their customers avoided delays. They would also have strong incentives to make the most efficient use of existing infrastructure. Lower off-peak tolls would help spread traffic more evenly and help ensure that drivers with a low value of time did not impose expensive delays on those with a high value of time.

It is instructive to contrast the incentives facing private road owners with those of governments implementing road pricing schemes. Politicians and bureaucrats would face strong pressure from special interests to exempt favoured groups (for example, black cabs are exempt from the London Congestion Charge). Toll rates would be set for political reasons rather than to maximise profits by providing a good service to drivers. This can be seen on public transport, where fare levels are often determined with little or no regard for congestion levels. Tolls could also be used as an additional form of taxation, for example to fund bus or tram schemes. Redistribution to other transport modes was a key element of both the London Congestion Charge and the proposed Manchester road-pricing scheme.

In all likelihood, government controlled road pricing would end up costing the economy dearly. It would almost certainly be imposed on top of existing taxes such as fuel duty. Existing distortions to the transport market would therefore be magnified. In practical terms this would mean more peak-time commuters being forced onto already overcrowded public transport links, with their regulated fares and massive state subsidies. Political pressure would grow for more state spending on expensive train, tram and bus infrastructure.

A further danger comes from administration costs. Whereas private business have strong incentives to minimise running costs in order to maximise profits, government officials are incentivised to increase bureaucracy to raise their budgets and expand their remit. It is quite conceivable that some kind of complex road pricing system could end up being as expensive and disastrous as other big government IT projects. Admin costs could easily destroy a large part of the benefits of road pricing.

Perhaps the biggest danger of all, however, is that road pricing would become a key part of the government’s green agenda. It could be used as a command and control mechanism to drive motorists off the road to help meet ambitious climate change targets. The economic costs – reduced labour mobility, less competition and specialisation, smaller economies of scale – could well be subsumed by environmentalist objectives.

In this context, it is understandable that many motorists and road-user groups are vociferously opposed to the introduction of pricing. The key to the successful implementation of road pricing is therefore to take the politics out – which in practice means transferring control from government to private owners and local communities. Moreover, the dynamism of the entrepreneurial private sector would quickly deliver benefits to motorists, helping to address their doubts about pricing.

The largest benefits would come from a more commercial approach to investment. Profit-seeking entrepreneurs would tend to build new roads in areas of high demand. They would also consider factors such as construction costs and the possibility of additional returns from land development along the route. In this way, a private road market would tailor new routes to the preferences of customers. This contrasts markedly with state provision of infrastructure.

Governments tend to put politics first and economics second. Decisions on new roads tend to be made for political reasons rather than to maximise returns – although cost-benefit analyses do at least weed out some of the worst schemes. Environmental groups might succeed in stopping a scheme even when its economic benefits are substantial. Local councils might lobby for a new link to promote regeneration in their area. One of the worst examples of politicisation is the Humber Bridge, which opened in 1981. This loss-making project was the direct result of a blatant election bribe by the Minister of Transport during the 1966 Hull North by-election.

As a result of politicised decision making, patterns of road provision may bear little relation to patterns of consumer demand. There may be gaping holes in the network, such as the absence of a direct motorway link between Manchester and Sheffield. At the same time, many rural links are underused with vast overcapacity while urban routes – particularly in the South-East of England – are overcrowded.

Private ownership can bring much needed economic rationality to road investment. The introduction of pricing would provide valuable information for road entrepreneurs about where expanding capacity would be most profitable. And private road-builders would be far less susceptible than politicians and bureaucrats to interest groups looking for special privileges at taxpayers’ expense.

Then there is the issue of innovation. Under state control, roads are subject to one-size-fits-all regulations that stifle new ideas and hamper efficiency gains. With private roads, owners could be free to devise rules that were appropriate for both their customers and their infrastructure.

On safe stretches of motorway, speed limits could be increased, delivering significant time savings. Some of the largest benefits would accrue to low-income travellers using coaches, which are currently limited to 100 kph within the European Union. Removing that limit could deliver a revolution in low-cost travel.

Weight restrictions on goods vehicles are another area that could benefit from the flexibility of private road markets. Huge productivity gains would be possible by raising the maximum weight and indeed by allowing the multi-trailer ‘road trains’ seen in countries such as Australia and Canada. Private road owners would, of course, have to trade-off the benefits with the costs associated with increased wear and tear, the impact on other road customers and so on.

Although the UK government is focusing on motorways and trunk roads, it should not neglect the benefits of privatising local roads. In some parts of the world, including Sweden, many local roads are owned and maintained by private road associations, whose members are residents and businesses. In many developing countries such as Brazil and South Africa, large private communities administer roads and other infrastructure, effectively taking on the role of local government.

Private ownership means road infrastructure can be far more responsive to local needs. For example, there is evidence that Swedish road associations are far more efficient at maintaining roads than governments. Since local residents own the infrastructure, faults such as potholes are reported quickly and repaired – before more serious damage takes place that would be far more expensive to fix.

In areas plagued by high crime rates and anti-social behaviour, private ownership enables residents to restrict access to their streets. Indeed, in some African cities, locals have even gone as far as illegally taking control of streets by erecting barriers without the permission of local authorities. This is viewed by residents as one of the most effective ways of securing their neighbourhoods.
 
Communities can also determine rules on parking and speed limits that suit their particular circumstances. For example, residents of a street containing young familes might decide to impose a very low speed limit for safety reasons. 

The privatisation of local roads therefore seems very much in tune with UK plans to hand back power to communities, whether through the localism or ‘Big Society’ agendas. The British government will therefore miss a golden opportunity if it places severe restrictions on private road owners. Instead, it should be freeing the road sector from deadening state control. Once unleashed, entrepreneurial creativity and local knowledge will deliver enormous social and economic gains.

20 May 2012, InfraNews

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Road privatisation can deliver huge benefits – but only if government gets out of the way

March 4, 2013

The British government is finally recognising the strong link between transport infrastructure and economic growth. The Budget set out plans for a national road strategy while earlier this week the Prime Minister announced that motorways and trunk roads could be operated by the private sector.

The new proposals represent a significant shift in policy. Since the early 1990s public transport has been prioritised by successive governments. Huge subsidies have been given to buses, trams and trains. Expenditure on roads has focused on deterring car use through traffic calming, new controls and priority lanes for buses and bicycles. But despite these measures, private cars still carry 85% of passenger traffic. In most areas public transport carries a tiny minority of travellers (with the important exception of travel to and from central London).

In practice public transport simply does not have the capability to move more than a small fraction of passengers and goods around the UK. Economic activity is too dispersed and buses and trains don’t offer the flexibility and convenience of cars and lorries. Moreover, public transport requires massive taxpayer subsidies – totalling over £10 billion per annum. It is inconceivable that a heavily indebted government could increase this burden much further.

Improvements to the road network offer far better value for money and need not cost the taxpayer a penny. Unlike many rail projects (High Speed 2 is a typical example), road schemes can be self-financing with construction and operating costs funded by tolls. This makes roads an ideal investment for the private sector. Without the need for government subsidies, the political risks are much smaller than with public transport. David Cameron is therefore right to see the huge potential for greater private sector involvement in the core road network.

The benefits of privatisation are potentially enormous. Private operators would depend on toll revenues for their profits and they would have very strong incentives to provide a good service to customers. Congestion – which currently costs the UK economy about £20 billion per year – could be eliminated by flexible pricing, with off-peak users offered bargain rates. Safety could be improved dramatically as operators sought to avoid costly delays from accidents. Perhaps most importantly, investment in new capacity would reflect consumer demand rather than political priorities. In marked contrast to the current system, new roads would be built where they were needed most.

Privatisation would also bring entrepreneurship and innovation to the road network. This is how really big efficiency gains become possible. For example, private operators could increase weight and size limits on goods vehicles. Imagine the productivity gains in the distribution sector if each lorry could carry say 50% more cargo. Speed limits could also be increased where safe to do so, leading to massive time savings and lower business costs. All manner of improvements would be possible as entrepreneurs sought to maximise the returns from their infrastructure.

But none of these benefits will be possible if government regulates the roads too tightly. Private firms need flexibility if they are to innovate. And this is where the current plans fall short.

The Prime Minister talked of private companies leasing roads instead of owning them outright. And he said that pricing would only be permitted on new capacity; it would be prohibited on existing infrastructure. Operators would also be subject to strict rules set by a regulator, in a similar framework to the water industry. There won’t be much scope for entrepreneurship and innovation under such arrangements. The benefits from such a limited form of privatisation are likely to be small.

There is also a danger that private operators will be subject to the kind of complex contractual arrangements seen on Britain’s railways. Rail subsidies have roughly trebled in real terms since privatisation, largely as a result of high ‘transaction costs’ resulting from the artificial fragmentation of the industry.

The government must be careful not to repeat this mistake on the roads. In the longer term, it should also move to remove distortions to transport markets by moderating fuel duty and phasing out subsidies. Road privatisation can deliver huge economic benefits – but only if government gets out of the way.

22 March 2012, Reuters

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Infrastructure stimulus will be counterproductive

February 23, 2013

As the economic slump persists, calls are growing for an increase in infrastructure spending as a means of boosting growth. Both David Cameron and Nick Clegg have announced plans for the delivery of planned schemes to be speeded up in order to bring forward the alleged benefits.

In theory, investment in infrastructure has tremendous potential to promote recovery. Improved transport links can reduce journey times and deliver significant productivity gains. Businesses can pass on their savings to customers in the form of lower prices, which in turn boost demand for their products and services. Transport investment can also increase productivity by lowering the costs of trade, which in turn promotes competition and specialisation, as well as facilitating greater economies of scale.

Energy investment can be similarly beneficial. Lower energy bills reduce business costs and increase productivity by enabling greater use of labour-saving technology. The released labour can then be put to other productive uses.

The policy of increasing infrastructure spending during a slowdown is therefore very appealing; however, there is one major problem: politics.

Politicians and senior government officials have very poor incentives to invest efficiently. Instead, they are likely to allocate resources in order to boost their own positions. Politicians may seek to satisfy special interest groups and increase their chances of re-election; senior officials may seek to enhance their power and status by consolidating their department’s influence over policy. In addition, ideological considerations – such as a focus on ‘fairness’ or the environment – may trump economics when it comes to investment decisions.

A further problem is the loading of financial risks onto taxpayers. Politicians and bureaucrats may be less concerned than private investors about making bad investments that lead to huge losses.

The history of infrastructure spending bears out these concerns. A high proportion of investment has been directed towards loss-making projects that have failed to make anything close to a commercial return. Worse still, many schemes have required ongoing operating subsidies to keep them going. Capital expenditure has been written off.

Recent examples of loss-making projects include the tram schemes constructed in several major UK cities over the last two decades, the Channel Tunnel Rail Link (High Speed 1) and the upgrade of the West Coast Main Line. In today’s money, the total cost of these schemes is in the order of £25bn.

Part of the problem is that politicians seem to favour high status ‘big projects’ over smaller schemes that offer much better value for money for taxpayers. The government is now supporting big and expensive rail projects, such as Crossrail (£17bn) and High Speed 2 (HS2, £34bn). Both of these schemes are likely to be loss-making. Taxpayers, not commercial investors, are funding their construction. Realistic projections of passenger numbers also suggest that fares will struggle to cover operating costs, meaning taxpayers will face an ongoing subsidy burden for decades to come.

It is important to point out that such investment decisions are essentially political in nature. According to the government’s own cost-benefit analyses, there are a very large number of transport schemes with far higher returns than Crossrail and HS2. Some, such as the Heathrow expansion, would have been entirely privately funded. Yet most of these initiatives will never be undertaken. Scarce resources will instead be devoted to wasteful high-profile vanity projects.

However, there is an argument that when it comes to promoting recovery, long-term returns are perhaps less important than boosting short-term demand in the economy. Keynesian economists argue that increasing public spending can create a positive multiplier by utilising idle resources. For example, if unemployed people are given jobs, they then have more money to spend on goods and services.

There are, however, several reasons why stimulus policies are unlikely to succeed in achieving a sustainable recovery.

Firstly, public spending absorbs resources that would otherwise be available to the private sector – a process known as ‘crowding out’. Private sector investment will tend to decline as the role of the government expands.

Secondly, stimulus policies inevitably involve higher levels of government borrowing. Increased public debt puts upward pressure on interest rates, raising the cost of loans for private investment. It also raises expectations that taxes will rise in the future to pay off the debt, which in turn reduces investors’ confidence in the long-run performance of the economy.

Finally, public spending creates vested interests that depend on continued government support. After the recession is over, it becomes difficult for politicians to withdraw subsidies for activities initiated during the stimulus programme. The role of the state may increase permanently as a result of policies undertaken during slumps, with highly negative long-term economic effects resulting from a higher tax burden and less economic freedom.

Historical evidence appears to support critics of stimulus policies. For example, many commentators now view Roosevelt’s New Deal as a failure in terms of promoting recovery from the Great Depression. Wasteful spending on new roads, dams and irrigation projects arguably ‘crowded out’ private sector investment on more productive enterprises. Indeed, the US went back into recession in the late 1930s – in 1938, for example, living standards were lower than they had been 15 years earlier in 1923.

More recently, infrastructure spending spearheaded efforts by the Japanese government to lift the country out of prolonged stagnation. Once again, the economic record suggests that this was unsuccessful. Worse still, the ill-fated stimulus programme has left Japan with a national debt at over 200% of GDP – higher than Greece and Italy.

So even if stimulus spending were somehow allocated efficiently, there would still be major downsides. In reality, there is little reason to expect that the UK government will invest any more successfully than other governments. Indeed, recent evidence suggests that infrastructure investment will be wasteful, politically driven and will incur losses that burden taxpayers for decades to come.

19 December 2012, PPPJ

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High Speed 2 is a deeply flawed project

February 23, 2013

HS2 534

Earlier this week, in a piece for ConservativeHome, Karen Lumley MP launched an astounding attack on our latest research paper, High Speed 2: the next government project disaster? Her article was astounding firstly because it failed to to address the detailed criticisms of HS2 set out in our analysis, and secondly because in places it parroted almost verbatim a briefing released by the ‘Yes to High Speed Rail’ campaign.

Contrary to the assertions of the high-speed rail lobby, our study shows that the economic case for the proposed scheme is very far from robust. Indeed, we conclude there is a high risk that HS2 will be the latest in a long line of government big-project disasters with higher-than-forecast costs and/or lower-than-forecast benefits.

The list of failed schemes includes the Channel Tunnel Rail Link (now known as High Speed 1), where passenger numbers after completion were only a third the level estimated at the planning stage. The line was uneconomic and most of the capital costs had to be written off – at huge expense to taxpayers.

HS2 is also uneconomic, of course. On a commercial basis it will be hugely loss-making, since the costs will far exceed the revenues – hence the need for such enormous subsidies. And the bulk of the financial risks will be borne by taxpayers, who will be forced to fund the scheme whether or not they use the train services. The main beneficiaries will be a fairly small number of relatively wealthy rail travellers, including long-distance commuters subsidised to make even longer trips, while the costs will be dispersed across the tax-paying population of the UK.

As with HS1, the case for HS2 is based on very high estimates of future passenger traffic. If passenger numbers are lower than expected, the bill for taxpayers will be even larger. And there are further flaws in the economic case.

One of the most ridiculous assumptions is that business travellers are unable to engage in any productive work on the train. In an age of laptops and mobile technology, this is clearly implausible. Yet it forms the basis of the time-savings estimates that are used to justify HS2.

The impact of competition on passenger numbers has also been neglected. When HS2 opens there will be spare capacity on the existing West Coast Main Line (WCML). Indeed, existing stations on the WCML – such as Birmingham New Street – are likely to be more convenient for many travellers than the new HS2 stations. Competition from alternative routes is likely to put downward pressure on both passenger numbers and fare revenues on HS2. Taxpayers will once again be on the hook for any shortfall.

There will also be serious cost implications from the decision to terminate the proposed line at Euston. Just under a quarter of the construction costs of the London-Birmingham route will be spent on the five miles from Euston to Old Oak Common, a total of about £4 billion. Worse still, the Underground station is already overcrowded at peak times, while the Northern Line and the Victoria Line are among the most congested on the entire Tube network. Realistically, the problem of passenger dispersal at Euston will require further investment in expensive infrastructure, whether a new Underground line or a Crossrail 2 link. The Treasury should be extremely concerned about the wider implications of HS2 for public expenditure, particularly in the context of extremely high levels of government debt.

Policymakers should also be highly sceptical about the wider economic benefits claimed for high-speed rail. While certain areas will undoubtedly benefit from a large injection of taxpayers’ money, there will be wider economic losses from the additional taxes needed to fund the scheme. It is well known that higher taxes destroy wealth – by reducing work incentives and hampering investment, for example – yet this has not been factored into the government’s assessment of the wider economic impact of HS2. Lower taxes and less regulation would do far more to regenerate the North of England than a hugely expensive rail line.

Before even considering spending £34 billion on high-speed rail, the government should be addressing the enormous burden already imposed on taxpayers by existing rail subsidies, which totalled at least £5 billion in 2010. Unless these subsidies are phased out, together with price controls and other distortions, the real level of demand on the railways cannot be determined and, accordingly, resources are likely to be misallocated. If HS2 goes ahead, taxpayers will be punished for the government’s failure to expunge socialist economics from Britain’s transport sector.

27 July 2011, ConservativeHome

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Politicians should get out of the transport market – starting with High Speed 2

February 23, 2013

Britain’s transport sector is cursed by endless intervention by politicians. Investment has tended to be driven by political priorities rather than consumer demand. The emphasis has been on satisfying concentrated special interests rather than the wider populations of taxpayers and transport users. The latest example is High Speed 2 (HS2) – critiqued in a new IEA paper released today.

HS2 exemplifies the government’s flawed approach to transport policy. It is a centrally-planned, highly political project with all the deficiencies that implies. In particular, central planners struggle to allocate resources efficiently because they cannot access the dispersed and subjective information held by individuals. This problem is exacerbated on the railways since policymakers are operating in the absence of genuine market prices. Indeed, a wide range of economic distortions, including price controls, large state subsidies and an artificial industry structure, make it very difficult to make efficient investment decisions.

The incentive structures facing politicians and transport planners also lead to the misallocation of resources. Financial risks are offloaded on to taxpayers, often many years in the future, while in the short-term politicians and senior civil servants can gain prestige from their ‘grand designs’.

Accordingly, it is unsurprising that the government’s economic case for HS2 is deeply flawed. The passenger and revenue projections are hugely optimistic compared with other, independent,estimates. There are also several unrealistic assumptions – perhaps the most ridiculous is that business people can’t do any productive work on trains. It is also clear that the route of HS2 has been ‘gold-plated’ with little regard to the costs imposed on taxpayers and property-owners: it will be hugely expensive to tunnel the line to Euston and the implications for overcrowding on London Underground may lead to billions more in infrastructure expenditure (funded largely, once again, by taxpayers rather than passengers).

An alternative to the politicisation of the transport sector is provided in Chapter 10 of Sharper Axes, Lower Taxes. Clearly cancelling big, uneconomic projects such as HS2 is a first step. But reform must go much further. Genuine privatisation is needed, not just on the railways but also on the roads. This means more than transferring nominal ownership. Subsidies to public transport should also be phased out, the tax treatment of different modes should be harmonised and the sector should be deregulated. The chapter identifies £15 billion of annual savings to taxpayers in 2015 from such a policy, plus considerable privatisation receipts that could be used to cut fuel taxes. Getting the government out of transport will also ensure that investment serves the needs of consumers rather than inflating the egos of politicians.

19 July 2011, IEA Blog

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Regulation, not privatisation, to blame for inefficient railways

February 23, 2013

The recent history of Britain’s railways has undoubtedly brought the whole concept of privatisation into disrepute. But this is unfair. Rail privatisation was a pastiche of genuine privatisation – in many ways it actually increased the level of state control.

Last week’s McNulty Review estimated that costs are about 40% higher on Britain’s railways than comparable European networks. Taxpayer subsidies, adjusted for inflation, have probably more than tripled since the British Rail era – reaching around £7 billion per annum. As McNulty explained, higher costs are to a large extent the result of the fragmentation of the industry. A vertically integrated industry was split up, with different firms managing the infrastructure, running the trains and leasing the rolling stock. As a result, transaction costs mushroomed.

It is a myth, however, that fragmentation was the result of privatisation per se. The government imposed an artificial structure on the industry from above. Indeed, when train operators subsequently approached the government with a view to taking ownership of the track, they were rebuffed. Moreover, the regulations imposed on the ‘private’ rail industry made it virtually impossible to close loss-making lines, while franchise agreements with train operators effectively forced them to continue running uneconomic services.

By contrast, the structure of a rail industry under genuine private control would be determined by market forces. Historical experience suggests that vertical integration would predominate. This may be explained both by the desire to minimise transaction costs and the relatively high degree of asset specificity on the railways (for example, rolling stock is often designed for use on particular routes). Moreover, genuine private owners would be free to close uneconomic lines and cancel loss-making services. Freed from government price controls, they could set fares to address overcrowding. Expensive new capacity would be funded by fares and land development rather than taxpayers (many of whom never use the railways).

A truly private railway would be efficient, innovative, responsive to consumer preferences and would not require taxpayer support. It is time the critics (such as Will Hutton) stopped blaming privatisation for problems caused by government intervention.

24 May 2011, IEA Blog

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Hammond’s Soviet-style rail policies

February 23, 2013

When Transport Secretary Philip Hammond announced last week that the government would procede with three big rail projects – High Speed 2, Crossrail and Thameslink – it was a bit like a Soviet commissar boasting how many new tractors he would be sending to favoured collective farms.

These schemes are almost entirely state-directed: taxpayers will pay for the infrastructure and officials will determine the details of the routes. And like so many socialist grands projets, the returns on the “investment” are likely to be negative, since taxpayers will in all likelihood have to provide substantial operating subsidies to support the new train services (as has been the case with High Speed 1). In addition to these direct costs, there will also be significant deadweight losses resulting from the associated taxation.

As well as imposing enormous costs on taxpayers to fund uneconomic rail schemes, it is also telling that the government has actively prevented major private-sector investment in new transport capacity through its airports policy and its prohibition of Heathrow expansion.

Students of Austrian economics will not be surprised that the misallocation of resources by the state is endemic in the transport sector. Transport is subject to a very high degree of central planning by politicians and bureaucrats, with new rail schemes representing just one example. And Austrians have explained why central planning authorities are incapable of making efficient resource allocation decisions.

In particular, central planners are hampered by the absence of relevant market prices and therefore find it very difficult to calculate accurately costs and outputs (see Mises, 1949, p. 696). While there are prices on Britain’s railways, these are severely distorted as a result of huge government subsidies, the regulation of many fares, the imposition of an artificial structure on the industry, planning controls and so on. A scheme that appears to have positive economic benefits may only do so as a result of other layers of harmful state intervention.

Moreover, since government decision-makers do not own the capital they are allocating they have less incentive to act responsibly or show initiative. They lack the “commercial mindedness” of entrepreneurs (see Mises, 1935). It is also worth mentioning the insights of public choice theory on the behaviour of politicians and bureaucrats – in particular how decision-making processes tend to be captured by concentrated interest groups such as the rail lobby at the expense of dispersed taxpayers.

If the government wishes the UK to have an efficient and competitive transport sector that does not burden taxpayers and which fosters prosperity by lowering the costs of trade, it should reject the central planning mentality, remove distortions, and shift the supply of infrastructure to the private sector.

1 December 2010, IEA Blog

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Time to pull the plug on Eurostar?

February 23, 2013

The dismal economic returns on the Channel Tunnel Rail Link are a stark warning to supporters of a high-speed line to Scotland and the North of England.

The total cost of the link, now renamed “High Speed One” (HS1), is close to £10 billion in today’s money, when all the hidden subsidies and extras are included. And this figure does not include the substantial “deadweight” losses from the additional taxation required to fund the line. A commercial business would expect to make an annual return well above £500 million on such an investment, particularly since railways typically need to be substantially rebuilt after 30 or 40 years.

In this context, the return on HS1 is pitiful. Last year, the “investment recovery charge” levied on Eurostar was reduced by more than half to about £2,200 for each train service using the route. By my calculation, this adds up at most to about £40 million a year – a return of less than half of one per cent on the government’s original investment.

But even this return is questionable. Eurostar has made large losses during its sixteen year history and it remains to be seen whether the hidden subsidy of cut-price access charges will enable it to make sustained profits in the medium term. In other words, not just the infrastructure but the service itself has been heavily subsidised by taxpayers, meaning the overall economic return on HS1 has almost certainly been negative – even before inflation is taken into account. The local “Javelin” services to North Kent now using the line are also subsidised.

Of course, advocates of high speed lines may point to “wider benefits” such as regeneration. Indeed, the expensive re-routing of the Channel Tunnel link through East London was supposed to boost the area’s economy (as well as to facilitate currently non-existent through trains to the North of England). However, state-funded regeneration tends to be a negative sum game. Resources are inefficiently transferred from some areas to others, while social problems are displaced rather than reduced. Moreover, if nebulous “wider benefits” arguments were used consistently as a rationale for taxpayer support, just about every business activity would be entitled to subsidies and almost the entire economy would become socialised.

After sixteen years of support, the government should stop subsidising train services to the continent. Taxpayers could receive at least some compensation if the high-speed line were sold off to the highest bidder with the proceeds used for tax cuts and (unlike in current proposals for its “privatisation”) no restrictions imposed on how the route is used. Perhaps an unsubsidised international service could just about cover maintenance costs, with the sunk capital effectively written off. But far better returns could almost certainly be achieved by shutting down the line and disposing of the assets – which include substantial plots of land, tunnels under London and the Thames, and large amounts of scrap metal.

22 July 2010, IEA Blog

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The economics of airport security

February 23, 2013

Around 235 million passengers passed through Britain’s airports in 2009. Most of those – both arriving and departing – will have experienced significant delays due to security checks. While estimating the value of travellers’ time is an inexact science, the cost is likely to run into several billion pounds annually, particularly given the disproportionate number of high-earners who fly frequently.

There are also other costs, even more difficult to quantify. The high level of hassle and perceived unfriendliness may damage the reputation of the UK as a good place to do business or a welcoming holiday destination.Yet delays are likely to increase further with the introduction of controversial full-body scanners following the recent terrorist incident on a plane bound for Detroit.

The current approach would appear to be based on the politicians’ mantra of ‘something must be done’ rather than any sensible assessment of transport risks. Terrorism is insignificant in terms of death and injury. In the UK alone, for example, close to 3,000 people die on the roads every year. Low-cost road safety measures could be a far better use of resources than extra airport security. (Indeed, at the margin, longer airport delays may incentivise travellers to use their cars instead – actually costing lives.) There is also inconsistency in the policy towards different modes of transport, with next to no security on the trains or London Underground despite a similar risk of terrorist carnage (this is not an argument for stricter security controls on land transport).

A better long-term approach might be to give primary responsibility for air security to the airlines and airports. These firms would have a direct financial interest in improving the travel experience of their customers. Passengers could choose between high-delay, lower-risk and low-delay, higher-risk companies, according to their own subjective preferences. Airlines should also be free to set up ‘trusted flyer’ schemes to allow certain passengers to circumvent time-consuming and humiliating checks.

13 January 2010, IEA Blog

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