Monday, June 16, 2008
Private railways and the public good
Experience with privatisation over the past two decades has been mixed, to say the least. European opinion remains divided, whereas Japan and Australia seem convinced of its merits. Concessions in Africa and South America seem to be barely keeping their heads above water. But traffic figures seem to suggest that countries which have embraced the competitive ethos have benefited.
In many parts of the world, railways have been intrinsically linked with economic development and political control. And it is here that we find the greatest reluctance to release them fully into the private sector. The European compromise of private or state-owned operators competing on state-funded infrastructure seems to be a step forward, but some commentators suggest that vertical separation is only a half-way house, and this model may not prove sustainable in the longer term.
There are many privately-owned railways around the world, ranging from the huge Class I freight operators in North America to dedicated heavy-haul mining railways. The majority of them are freight operators, although the three biggest JR companies run profitable passenger businesses
We have commented before that one of the sticking points seems to be a reluctance amongst politicians to accept commercial reality — that a private-sector railway needs to earn profits to fund reinvestment and generate shareholder value, or it risks going out of business. A key factor behind the renationalisation in New Zealand is the perception that the private owners failed to invest in renewal of infrastructure or rolling stock, running down the value of the assets.
The importance of shareholder value is also highlighted by the ongoing dispute at CSX. The best way to make money is to identify market opportunities and exploit them — which may lie behind recent calls for reregulation from shippers in the USA reluctant to face the prospect of rising tariffs. But profitability is essential if a railway operator is to ensure access to capital for investment, and freight rates should be naturally constrained by competition if the market is working properly.
Last year’s study by the Association of American Railroads into future growth trends suggested that $135bn would have to be invested in capacity expansion on the US trunk network over the next 30 years. AAR estimates that the private railroads can raise $70bn of this through revenue growth and find another $26bn from productivity savings. But that still leaves a shortfall of $39bn to be addressed, and in this bastion of free market policy there is growing talk of seeking public money to reflect rail’s wider societal advantages.
To some extent, this change of attitude may reflect the growing awareness of environmental sustainability, with the perceived benefits of a modal shift from road to rail further complicating the balance between public and private control. Such societal benefits need to be properly valued, in order to avoid the risk referred to by CER Chairman Aad Veenman that mobility is seen as a ‘public good’ and under-valued. In a market economy, everything has a price. And if the public and politicians want their railways to provide services which are not commercially justified, they must be willing to meet the costs — whether the operator is publicly or privately owned.
We have always adopted the view that there is a place for both public and private operators, and neither should be seen as intrinsically better than the other. But it is vital to recognise that no railway — whatever its ownership — can deliver unless the underlying political and commercial framework within which it must operate is right for its market. Getting this right will be the biggest challenge for the railway industry in the years ahead.
