Transport, housing, domestic energy: an affordability crisis in the UK?

Transport and energy affordability in the uk

The electoral campaign is over, but it is easy to predict that questions of living standards and affordability will continue to be debated in the UK.
The parties’ housing policies have been under intense scrutiny (see here and here) as opinion surveys show that “69% of people believe the UK is bereft of affordable housing“. A comprehensive study on “Housing in 2040” sponsored by the Joseph Rowntree Foundation concludes that, “unless some of the trends in housing policy are reversed” (including a rapid increase in house building rates):

the link between income poverty and housing deprivation is likely to strengthen, with housing costs becoming a more important cause of poverty, and the experience of poverty more likely to be combined with the experience of housing deprivation

Affordable housing may be scarce in the UK, but how does it compare to other European countries? Poorly, according…

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Rail industry costs, open access, Labour’s plans for rail, and overseas perspectives on the UK

Interview of Professor Chris Nash by Lorna Slade of Rail Professional.
(Interview first published at www.railpro.co.uk and reproduced with permission).

As the first speaker at a recent forum on developing the UK rail network, Professor Chris Nash proved to be one of the highlights in a day of bland PowerPoint explanations marked at the half way point by an ultra-safe discourse from Clare Moriarty.

Nash’s talk was titled Competition, contracts and setting out a future roadmap’ and relaying some conclusions based on research he and his colleagues have done at the ITS, Nash began by informing us that the main problem in the industry is that costs are too high.

‘For all of my career’ said Nash, ‘I’ve taught my students that rail has big economies of density, so if you have a massive expansion of traffic on an existing network you can expect unit costs to come down. Actually of course they have gone up – since 1997 costs per train km have risen in real terms by 25 per cent, which given that train kms are growing is not what would be expected.’

Speaking to me in our subsequent interview, Nash points out that a big part of that has been infrastructure costs, and that’s all mixed up with the failure of Railtrack and then Network Rail’s costs being above European best practice, ‘although they are coming down and that will continue’.

What is more surprising to Nash is that competitive tendering hasn’t reduced train operating costs. ‘One would be hard pushed to make the case that franchising has failed to deliver good services, but in almost every other field, competitive tendering gets costs down, in almost every other country I’ve looked at it gets costs down. However in our case costs per train kilometre is a bit above what it was when the first round of competitive tendering finished.’

Some new evidence for the reasons why has come from Nash’s colleagues Phil Wheat and Andrew Smith who did some econometric work which suggests that actually our franchises are typically too big, and that the medium-sized ones have been more successful in controlling their costs. ‘In that context it’s interesting to know that on average our franchises are ten times the size of those in Germany and Sweden in terms of train kilometres,’ points out Nash. ‘We know about the problems of managing franchise failure, and I think the lesson has been learned that negotiated management contracts are a way of losing control of costs. We also know there have been totally exogenous factors but there are two big issues; the rise in staff costs, where real costs per train km are 30 per cent above where they were at the completion of the franchise process, and the trade unions, which have done very well out of privatisation – fragmentation has made them stronger I would say.’

Franchise lengths are also a key issue, he believes:  ‘My impression is that train operators really tend to want results for anything they do within four or five years, which is not surprising given our current franchise lengths, so when it comes to investment for instance, where the train operator is responsible for choosing rolling stock, what they really want is something they know they can rely on to work immediately, rather than looking at innovations that will reduce life-cycle costs. If you’re on a seven year franchise you’re really not interested in what happens beyond the next four or five years, and that’s a disastrous approach to rolling stock.

‘I see something of the same argument applies with working practices, if changing them is going to mean a big struggle and the results only really show in the longer-term, then there’s no incentive for the current franchise holder, so that’s why I would advocate longer franchises.’

Another factor that affects costs is a lack of alignment of incentives between infrastructure and operations according to Nash, who was part of a team which did some econometric work for the Community of European Railways looking at data for the past 20 years for all the countries of Europe and some in Asia, including Japan and Korea. ‘Our work suggested that this is a serious problem when we looked across the countries. What we found was that on more densely used networks, vertical separation tended to raise costs, and it’s not surprising this happens because these networks are where the integrated planning of operations and infrastructure matters most. We did some interviews that showed that while to some extent access charges and performance regimes and so on do give the right incentives to the different partners, there are lots of respects – despite all the efforts that have gone into sophisticated track access charging systems and a sophisticated performance regime – in which the partners don’t have an incentive to work together for the best solution, and simply pursue what’s best for them.’

Nash believes the South West Trains/Network Rail alliance with its sharing of changes in revenue and costs is something to be held up as a model that overcomes the misalignment problem, ‘except, because of the length of the franchise it’s still too short, but with longer franchises you can have much longer alliances as well.’

While acknowledging that alliances ‘are not necessarily the solution where there are a lot of different operators and where you can’t design franchising regimes to avoid that,’ Nash would like to see some arrangement to try to bring the incentives on different operators together.

Open access not the answer

Open access competition is not the answer believes Nash, and he is forthright about his scepticism. ‘We increasingly hear the argument: ‘If franchising didn’t control costs surely allowing much more open access will’, and that for intercity franchises maybe we don’t need a franchise at all, that everything could be open access.  But there are some significant disadvantages.

‘The DfT is concerned that where it competes with franchises it reduces their profitability and increases the total subsidy bill for the railway, and I think there’s an argument that it makes wasteful use of track capacity, but maybe that could be countered by higher track access charges, particularly where capacity is scarce. More importantly I think it fails to produce a well-integrated timetable; Network Rail recently produced a paper on improving connectivity in which it has gone for the ideal solution which costs a lot of money in infrastructure investment. We did some work at the Institute that suggested that if you accepted less than ideal you could still get a lot of benefits through a more systematic approach to timetabling.

Nash continued: ‘Despite having some criticisms of how it’s been done I think the principle of franchising – profitable services and unprofitable – is the best way of introducing competition, however open access competition is certainly a growing trend around Europe and the European Commission seems to favour it for commercial services but with not much evidence of a financially sustainable system of on-track competition, and most of the entrants have lost money.

‘So I think the answer overall lies in looking further at how we franchise, particularly at the length and size of franchises. We definitely need longer franchises, where the train operator is in the lead on planning and marketing, and Chiltern of course is the model, I think everyone agrees it’s a success.’

Labour’s plans 

Labour’s plans regarding franchising are well-documented, and Nash is thoughtful on this. ‘They’ve spoken of allowing a public sector operator to compete with the private sector for franchises, which is the case in Sweden, Germany, Netherlands and Denmark, and it seems to work. So I don’t think it’s as silly an idea as some people are saying. It provides a public sector comparator and ensures competitive bidding, although we generally have had fierce competition for franchises so I’m not sure that it’s necessary from that point of view, but it is some sort of a safeguard.

‘The other thing Labour has spoken of is an enhanced role for Network Rail although I’m not too clear what this would be. Certainly in some respects if Network Rail did have a bigger role things would work better, for example it recently carried out a study of East Anglia on improving connectivity which concluded that if the timetable were planned as an integrated whole you could provide a lot of benefits, to smaller flows in particular. So if Network Rail played a much more forceful role in the timetabling that could improve the system.’

Overcrowding and fares

The industry is perceived by many to be mostly foreign-owned, feeding profits back to countries’ native rail networks and paying hefty amounts in dividends to shareholders. How can that image be altered? ‘I think to a degree the Rail Delivery Group, by providing a voice for the industry is doing something to alleviate that needless to say distorted view. Generally satisfaction with the rail industry is quite high and on the whole we do now have good services, but I think the two big causes of dissatisfaction are overcrowding and fares. The latter partly because people think they’re high and partly because the system remains very complicated. If there was more of a common framework for fares between the different operators that would help – currently we have things like off peak returns but they mean different things for different operators and it just confuses people.’

Rail Professional columnist Andrew Meaney of Oxera recently pointed out that regulated fares are no longer serving passengers in a transformed rail market, especially in the area of consumer protection. I wondered if Nash believes they should continue to be regulated? ‘I think they should, but with changes in how it’s done.’  There are currently strong incentives on Toc’s to market all their cheaper offers as advanced purchase tickets for specific trains, and if walk-on fares became extremely high that would be a significant disadvantage for consumers who don’t always want to tie themselves to a particular train or who have to travel at short notice. So I think some regulation is needed although it’s currently working to create artificial peaks and that needs to be avoided.’

One possibility, he suggests, ‘would be to regulate a basket of walk on fares rather than simply the saver fare – for the longer distance services. For shorter distances there are major issues involved regarding transport and land use planning as a whole. To what extent do we want to encourage rail commuting into large cities? To what extent do we want flexible ticketing covering bus and rail? I think it’s sensible for the franchising authority particularly where the franchising is devolved, to set the fares, not just regulate them but actually set them.’

Widespread activities

Nash has had a long and illustrious career in transport economics, much of it connected to the University of Leeds where he started in 1975 as British Rail Lecturer in Rail Transport.  He became a professor of transport economics in 1989 and then a research professor at the University’s Institute for Transport Studies in 2008.  Now semi-retired he plays more of an advisory role but in outlining his activities, by most people’s standards he is extremely busy.

In terms of current research, one of Nash’s big interests remains railway reform, and what works best in different circumstances, and there are plans for further work on this with Japanese and Korean colleagues. He continued: ‘I am also contributing with colleagues to an examination of the effectiveness of track access charges in encouraging efficient design of rolling stock, as part of the SUSTRAIL project for the European Commission which is just reaching its conclusion. The wider SUSTRAIL work also involved carrying out a business case appraisal of the proposed technical innovations, as well as new work to understand the marginal wear and tear costs of rail infrastructure usage, combining econometric and engineering methods.’

Nash also recently prepared a review for the International Transport Forum with colleague Andrew Smith of the measurement of rail efficiency, ‘an area in which ITS has done a lot of work both relating to infrastructure and operations.’

He serves on the HS2 advisory panel and also a Transportation Research Board committee in the US which is examining high speed rail as a part of a general review of intercity transport. ‘That keeps me involved on the debate on high speed rail, where the work of my colleagues on demand forecasting and valuing time savings is playing an important role.’

As well as that he is still does some teaching, including leading a short course on rail economics for staff of the DfT’s Rail Executive in the near future.

Speaking of the Rail Executive, I mentioned that I had interviewed Peter Wilkinson, head of its Passenger Services directorate, who is disappointed at the lack of true market liberalisation across Europe, with countries ‘spending nearly all their time resisting and fighting it’, as he put it, despite having their national operators here. Without overtly agreeing Nash observes that although British Toc’s such as National Express are making some gains in Germany, ‘either they’ve not been bidding or they haven’t been successful even where they have had the opportunity, which is a bit surprising given the experience they have.’

An overseas view of us

I wondered what Nash’s doctoral students think about UK rail? ‘That’s an interesting question. A lot of them are from overseas and very often they find it hard to understand how such a fragmented system could work; for instance when I talk with Japanese doctoral students and other academics, the Japanese view is absolutely that track and services need to be provided by the same company. I would say the same with North America – almost all North American transport economists believe vertical integration is absolutely essential to a railway. That’s certainly one thing that comes out.’

Our rail regulator is well-regarded though: ‘I have a foreign student working on regulation and can say that in terms of the role of the rail regulator Britain tends to be looked upon as a model of how to do it. I’ve criticised some of the things we’ve done but in terms of regulation I think we’ve pretty well got it right in terms of independence and in terms of putting pressure on the infrastructure manager, which in many countries the regulator doesn’t do and has no powers to do.’

In his free time, Nash enjoys hiking and is chairman of the ‘rather unusual’ Dales & Bowland Community Interest Company, which procures the Sunday Dales bus network – ‘we get funding from various sources and contract out the actual operation but we plan and market the services, so I’ve got a foot in the bus industry and that’s an area that’s harder than rail, certainly in terms of funding.’ Needless to say, I’m certain Nash will put his mind to a solution.

www.its.leeds.ac.uk/people/c.nash