Privatisation Essay- Transport Economics

Discuss the extent to which privatization of the UK railway has been economically worthwhile.

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  • Created on: 23-06-11 17:03
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Discuss the extent to which privatization of the UK railway has been
economically worthwhile.
Privatization is the process by which the former publicly owned organization or activity
is sold off to the private sector. There are three processes of privatization. These
include the outright sale to another company, a management/employee buyout or
making shares publicly available. In 1992, the "new opportunities for British rail" White
Paper put forward some powerful economic arguments from privatization. Two years
later Britain had privatized railway, and the first passenger franchises were awarded to
private sector train operating companies. The aim was to more efficiently utilize the
railways, provide greater responsiveness to the consumer, to see a high quality of
service and give better value for money for all rail users as well is to generate new
capital investment.
There are now 23 franchises available, and the Department for Transport decides who
the franchises will be given to. Examples of franchises include Virgin Trains, go ahead
and Arriva. The infrastructure is owned and maintained by single organization: this is
network rail and can be described as a non-profit company invests all profits back into
business, However it operates privately.
There are many perceived benefits of privatization, and many of these aspects have
benefited the rail industry. Firstly, the removal of barriers to entry has increased the
number of firms operating In the more contestable market. This has a number of
benefits, both in economic and consumer benefit related terms. With a greater level of
competition in the market (franchises are offered every two years meaning incumbent
firms are constantly threatened with new entrants), firms will be forced to operate
more productively (MC=AC) and allocativly (P=MC) efficient in order to gain customers
(through better customer service and greater reliability for example) and to profit
maximize. This may result in a lowering of fair price, however many would argue that
this is only a short-term benefit, as abnormal profits cannot be made in the long term
as new entrant into the market may use hit-and-run tactics or cream skim off abnormal
profits, resulting in only normal profit to be made in the long run. Furthermore, in more
recent years, especially in urban areas such as London, customers have experienced
above inflation increases in fair prices of around 3 to 5%.
In terms of allocative efficiency, a private firm could be expected to have much greater
control over its routes. For example, a private firm may run more services on major
roads at peak times then a nationalized company would, and may use price
differentiation at high and low peak times of travel in order to gain leisure customers for
example And to better manage the efficiency of the service. In 2004, there was a
33.3% increase in the number of passenger journeys compared to 1995 figures, And
since privatization, there has been a reversal of a 35 year steady decline in passenger
journeys. This is a significant increase which may be due to the effects of privatization,
however other factors could influences figure such as the price of alternatives
increasing, fashions and trends and population growth. Furthermore, many people are

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Since privatization, you could expect that private firms would be less likely to reinvest
profits, as they seek to profit maximizing the short run. However, the government
ensures that safety regulations are followed and re-investments are made, which has
led to a decrease in the amount of deaths occurring on the rail network. For example, in
2002 there were 0.3 fatalities per billion passengers. In 1992 there were 0.4 fatalities
per billion passengers.…read more

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For example to different franchises may build identical sets of track,
whereas it would be more efficient to run services using only one track. This would
inevitably lead to wastage and potentially an increase in passenger fares.
Another disadvantage of privatization would be that there is service unreliability due to
the network operating close to capacity. This could to some extent be overcome by
more effective signalling, longer platforms and trains, and even double-decker trains
have been proposed.…read more


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