Production economics of a vertically separated railway – The case of the British train operating companies

Abstract

This paper focuses on the production economics issuessurrounding the vertical separation of infrastructurefrom rail services with regard to passenger operations. Acase study of the British passenger railway privatisationis used. The British approach to rail reform is unique in three aspects. Firstly, the extent of horizontal separation of the former state owned railway, with the former monolithic state enterprise being divided into 104 individual autonomous units. Secondly, with only five years between the government white paper and full implementation of the revised structure, the time-frame over which these structural changes were implemented was very short. Thirdly, the extent of the involvement of the private enterprise in these reforms, with 96 of the autonomous units highlighted above transferred to theprivate sector.The most significant finding is that the size of train operating companies matter. In any vertical separation of the railway therefore, consideration needs to be given to the size (and hence number) of the train service provider(s). Furthermore, it was suggested that all British TOCs were operating on the downward part of the average cost curve i.e. all were too small in terms of trainkilometre production. Therefore, one of the key areas forproductivity gains for TOCs would be in the area of scaleeconomies. Finally, based upon estimates of the price elasticity of infrastructure, it would appear that in the British example the regulator has been reasonably successful in controlling the market power of the monopoly operator, Railtrack.