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ChrisB
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« Reply #44 on: May 20, 2011, 14:41:28 » |
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Those on a hobby-horse for re-nationalisation can dismount.....from the full report....
QUOTE
21.4 Renationalisation
A number of arguments have been put forward to support renationalisation.
First, the costs of the rail industry have increased since
privatisation. It is argued by some that this shows that privatisation
has not achieved its overarching objective of cost efficiency through
competition.
Second, Government still provides large subsidies to the rail industry,
with some of this money being paid to shareholders in dividends, which
is therefore lost to the industry.
Third, it is argued that renationalisation would create a simpler
structure with a unified, vertically- integrated organisation with
top-down goals and common objectives. This could reduce the duplication
of functions across the industry and allow economies of scale/scope to
be maximised. There could also be a reduction in transaction, legal and
consultancy costs, as there would not be the same level of external
procurement and matters such as discussions with the trade unions could
be dealt with nationally rather than by many separate companies.
Finally, owing to the nature of the rail industry, ongoing Government
involvement is needed to regulate the private monopolies within the
industry. This means it is unlikely that the industry will ever run as
an effective privatised industry.
The Study has considered these arguments and the key issues below.
21.4.1 Cost Efficiency
One of the primary advantages of the privatisation of nationalised
industries has normally been the increase in efficiency as companies
compete for contracts and then aim to make profits for shareholders.
However, in the rail sector, privatisation does not appear to have led
to the cost reductions seen in other privatised industries, many of
which have seen an initial average reduction of 4^6% per year in
operating costs.105 The Study^s analysis of the barriers to efficiency
improvement in GB▸ rail are set out in this report.
Some stakeholders have argued that cost efficiencies have been
difficult to achieve as British Rail was efficient. Smith, Nash and
Wheat compared the efficiency of British Rail with other international
railways. They find results to be inconclusive, with studies ranking
British Rail as the most efficient, others as the least efficient, and
some about average. However, they conclude that there is no strong
evidence that British Rail was any more efficient than its
international peers.
The efficiency performance since privatisation has been mixed. The
Office of Rail Regulation^s (ORR» ) international benchmarking has shown
that Railtrack^s/NR» ^s efficiency declined initially between 2000 and
2006 compared with European benchmarks, but has since improved and
efficiency is targeted to match those of the top-performing European
operators at the end of Control Period 5 (CP5▸ ) albeit this has yet to
be achieved. The Study^s own international benchmarking of TOC▸ costs
shows that GB rail costs are comparable to, if not below, those of
state-run operators in Europe.
Given the cost reductions seen in other sectors from privatisation, it
seems unlikely that renationalisation would lead to a reduction in
costs. As argued elsewhere in this report, it is the extensive
involvement of Government that has, to some extent, prevented the cost
reductions seen elsewhere.
Furthermore, where Government has taken control of aspects of the rail
system, costs have tended to increase rather than decline. For example:
^ Smith and Wheat (2009) show that where Government has been directly
involved in TOC contracts, for example where TOCs were put on
management contracts or had their contracts re-negotiated, there was
deterioration in efficiency. They found that, on average, the
efficiency of TOCs on management contracts was 1.8% per year worse than
other TOCs. By the end of the period that TOCs were on alternative
arrangements, their costs had risen by 16% relative to those that had
remained on standard franchise agreements.
^ The Office of the PPP Arbiter report assessed the relative
performance of the PPP Infracos, Bakerloo/Central/Victoria and
subsurface lines (BCV/SSL▸ ), which had been in public control since
2008, and Tubelines, which transferred to public control in 2010. This
found that since BCV/SSL had been brought into public ownership, cost
performance had got worse, and was moving away from the benchmark range
(although the opportunity for reduced costs was significantly greater).
Tubelines^ costs were examined before public ownership and showed a
significantly improving cost trend in 2008 and 2009, with costs
approaching benchmark levels.
Evidence from other sectors also suggests that private ownership is
more efficient than public:
^ equity-owned water and sewerage companies are, in general, more
efficient than their state- owned counterparts; and
^ between 1995 and 2007 private-sector services^ productivity improved
by 4.7%, whereas Government services declined by 12.6%.
21.4.2 Payments to shareholders
As private firms aim to increase profits, it is argued by some
stakeholders that this drains the rail industry of investment as
dividends are paid to shareholders rather than being reinvested into
the industry. Therefore, this argument suggests that the subsidies paid
for the service are higher than necessary to cover its costs to allow
companies to make a profit.
However, this argument assumes that the cost of services would be the
same if they were provided by a public- or private-sector company.
Private companies should be incentivised to reduce costs to create a
profit and it seems likely that the Government would need to pay the
same, if not more, for these services due to inefficiency in a
nationalised industry. This appears to be supported by the Study^s
international benchmarking of TOC costs and evidence from other sectors.
Furthermore, the scale of TOC and Rolling Stock Company (ROSCO» ) profits
is relatively small in relation to the overall costs of the industry.
In 2009/10 combined profits of TOCs and ROSCOs were around ^400m, which
was around 3% of total industry expenditure. This is a significant
reduction compared with 2007/08, when profits peaked at around ^900m,
reflecting the impact of the economic downturn. TOC profitability is
relatively low, with a typical operating margin of 3^5%. NR also makes
profits, although these tend to be reinvested in the network. In
general, rail contributes a small proportion to the overall profits of
transport groups and, consequently, the payment of dividends. The
efficiency improvements from private-sector involvement are therefore
likely to significantly outweigh the costs of paying dividends to
shareholders.
END QUOTE
There is more in this vein. One important factor to
note is that the profits made by the TOCs and the ROSCOs together
amount to no more than 3 per cent of the total industry expenditure.
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