Putting the brakes on railway nationalisation

The new Labour Party leader Jeremy Corbyn wants to re-nationalise the railways? It is a political totem for the Left, of course. But is there an economic case too? The main economic argument made for nationalisation is that private providers have to make a profit, so a private service is necessarily more expensive. But this is untrue. Where there is competition, the need to make a profit is what drives improvement by pushing private providers to deliver better services cheaper. If they do not keep improving, they will lose business their competitors. In the case of rail, that means other companies who would be delighted to win franchises off them.

Remember too that investing in a service that has to keep improving in order to keep its customers is expensive. Investors quite reasonably expect a profit in return for giving up and risking their capital in such an enterprise. If the government did not generate the same profit, it would, in reality, be subsidising the industry – at taxpayers' expense. So there really is little or no 'saving' to be made.

Another argument is that a nation-wide service would reap economies of scale. But remember that there are diseconomies of scale too: large state industries are notoriously hard to manage. And any supposed economies would soon be eclipsed by inefficiencies when there are no competitors to keep the provider on its toes.

The old British Rail, of course, did not make profits at all; indeed, it made a large annual loss. It was inefficient and vastly overstaffed, and yet survived. As with other nationalised industries, the problem was that decisions were made politically.

In the first place, a nationalised industry has to compete for investment with other government departments and services. Spending decisions owe more to the political necessities of the moment (like elections) than long-term investment strategy. Second, politicians fear that cutting staff costs causes them political problems, while cuts in capital investment are barely noticed: the service just gets slowly less reliable. Third, the lack of competition in a nationalised service gives huge strike-threat power to the staff yet leaves service users with no power take their custom elsewhere. And the lack of competition means that there is no pressure to change, to adapt to customer needs, stay up to date, modernise and cut costs.

Even where, for practical reasons, competition is limited (as in railways), the public is better served by an independent regulator scrutinising private providers than a nationalised industry responsible only to ministers and Parliament. The independent regulator can fearlessly point out when things are not up to standard. The minister, being responsible for the provision of the service, will never admit to failures. And independent regulators can become highly expert on every aspect of the sector they regulate – transient ministers with many other responsibilities cannot.

Competition, of course, is the best regulator, and much can be done to improve competition in most industries that have been privatised, including railways. Competition opens each and every part of the service provision up to scrutiny – and potential replacement – by others.

Prior to 1992, just a couple of years before the rail industry was privatised, British Rail did not even bother to keep punctuality figures. Is there a more eloquent statement of the dismal nature of nationalisation?