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Michaela Claire Smart

Discuss whether or not the Privatisation of the Railway has been successful
The privatisation of British Rail was completed in 1997 under the Railways act 1993 by John
Major’s Conservative Government
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There was a variety of reasons why the railway was left until last: British Rail was making a
loss, safety was a priority and the integrated national system had a complex system of fares
and railcards, in addition to the extensive nature of the national rail infrastructure
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For example, as
the Chairman of Railtrack has argued, the main problem is that it is impossible to lower
prices, and at the same time increase investment for improved safety, and meet targets for
improved punctuality1
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Freight is the transportation of goods and Passenger is the transportation of people
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Rail privatisation has not been beneficial to the economy for a number of reasons, especially
in Passenger Transport: a significant problem is that, to a large extent, the rail industry is not
a contestable market
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Perfect Information is a characteristic of contestable markets; its absence limits
the extent to which the passenger rail industry is contestable
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For example, TOCs (Train Operating Companies that
tender for the franchises) lease the locomotives and rolling stock from one of three rolling
stock companies: this has significant financial requirements and thus is a significant barrier to
entry
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This lack of contestability is a problem, as it decreases the
competitive nature of the market
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There are currently 23 TOCs that
own franchises but, due to fact that the railway is a natural monopoly, and in most cases the
franchises are effectively monopolies, with the sole rights to specific routes, and because
duplication would lead to an increase in average costs, this has meant there is a severe lack of
1

http://www
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org/macroeconomics/privatisation/rail-privatisation/

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Michaela Claire Smart

competition
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Allocative Efficiency is achieved when the Marginal Cost is equal to Average
Revenue, meaning that cost of production is at the value at which consumers value the good
or services and that scarce resources are allocated to produce the goods and services we most
need and want, maximising consumer satisfaction
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Firms will charge higher prices in order to increase their total
revenue in the hope of increasing their profit, therefore the and, as the demand curve
(Average Revenue curve) is downward sloping, the increased prices result in decreased
demand (a shift along the curve towards the left) and therefore there are consumers who want
and need to buy rail tickets who are unable to do so
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Productive Efficiency is achieved when the
Average Cost (AC) curve cuts the Marginal Cost (MC) curve in the short run
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As a result of the Profit Motive,
and the need to satisfy shareholders by paying high dividends, there is a substantial lack of
investment by TOCs, even though investment has increased, resulting in Productive
Efficiency and Dynamic Efficiency not being achieved
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Furthermore, because the TOCs with specific franchises are
effectively monopolies, they are not forced to offer the lowest possible price to consumers in
order to increase their market share, this not only leads to higher prices and thus a lack of
Allocative Efficiency but reduced investment as they have less incentive to keep costs low
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For example, managerial economies of scale, as each company has to employ specialists such
as for marketing, mean they are unable to operate at their Minimum Efficient Scale
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What’s more, the Government still has to pay an annual subsidy to TOCs, first because there
has been a significant lack of investment, as previously explained, and secondly because the
Private Sector TOCs do not take into account Positive Externalities: this second point,
coupled with the Profit Motive, means that many loss-making routes would not be in service
in the absence of Government subsidies
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Moreover, because of the Positive Externalities that the Private
Sector does not take into account, TOCs would operate at a lower output without the
Government subsidies and regulations
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Therefore, there is a still high financial strain on the Government
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Total government spending
on the railways was £3
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Conversely, there has been some success in the railway’s privatisation
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Moreover, the subsidy for the railway, while expensive, is considerably
less than the cost of running the railway and therefore it can be argued that, compared to the
cost of renationalisation and of running the railway, it is the better option
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Furthermore, the number of rail passenger km has
doubled since the railways were privatised
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There has also been an increase in the punctuality and frequency of trains
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Therefore, there has been some improvement in consumer satisfaction due to an increase in
the quantity and quality of services
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This will have had a multiplier effect
and helped to stimulate the economy
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Freight Rail, the transport of goods, has been considerably more successful than Passenger
Rail
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Moreover, these FOCs are more likely to be productively efficient,
producing the lowest point on their AC curve, as there is competitive pressure, as Freight Rail
2

https://en
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org/wiki/Privatisation_of_British_Rail#Customer_service

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Michaela Claire Smart

works on an Open Access system, giving consumers a choice between companies, so the
FOCs are forced to keep their costs low
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Also, their
Marginal Cost is likely to equal the Average Revenue, as competition forces them to charge
the market price, therefore increasing Allocative Efficiency
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In conclusion, the privatisation of the railway has had mixed success
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However, because Passenger Rail
TOCs effectively have monopoly power over their routes, along with the Profit Motive, there
has been a shortfall in investment and prices have risen; these negative aspects outweigh the
positives of Freight Rail and the increase in the numbers of people using the railway,
especially as there has been a less than proportional increase in the number of locomotives,
resulting in overcrowding on many routes
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The success of the privatisation of the railway has
therefore been limited

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