The Rail Industry Case Study

Technology of Rail Travel
The oldest known railway is the Diolkos. Operational for roughly 600 years leading , it ran over the Isthmus of Corinth. It thereby connected the Aegean Sea between Greece and Turkey with the Ionian Sea between Greece and Italy. It was used to haul cargoes, and possibly small ships, from one sea to the next, and was powered either by oxen or human slaves. The feature that made it a railway, rather than a road, are the grooves cut into the limestone, which guided the trolleys on which the cargoes rode.

Railways began appearing in Europe in the 14th century. For several hundred years, they ran on wooden rails, which needed replacing at frequent intervals as they wore out. Typically, one set of wooden rails was nailed on top of another, so they could be replaced without disturbing the railway’s foundations. Commonly used to transport coal from the mine head to ships, they relied on human or animal power just as the Diolkos had two thousand years before. In many instances the railway could be designed to make the most of gravity so that full wagon loads rolled down to the coast or canal, and only the empty wagons needed to be hauled back up the hill.

The next major innovation was metal rails. Much longer-lasting than wood, they were first made out of iron in the early nineteenth century, then steel from the 1850s onwards. The key innovation leading to the rapid expansion of rail was the steam engine. The first-ever steam engine, known as The Rocket, was built in 1829 by George Stephenson. It ran on the first railway open to members of the public, the Stockton to Darlington Railway. Passengers went on to become an important source of revenue alongside freight. Over the next 25 years, over 7,000 miles of railways were built in the UK, all based on this new technology. Steam engines were in common use in Britain well into the 1960s, and were still used extensively in China up until the first decade of the twenty-first century.

Steam engines are labour intensive, requiring large numbers of operatives to clean the engines and load the coal. Electrification first took place on tramways, metal rails dug into road surfaces, on which specialised buses, known as trams, run. Mainly horse-drawn up until the First World War, after which they were steadily electrified. The major move away from coal took place after the Second World War, when rising wage rates made labour-intensive steam power less attractive. This is basically the technology that railways in Britain still use. Those 7,000 miles of track laid by Victorian entrepreneurs are still in use, accommodating trains powered by electricity or diesel rather than steam.

The next stage in the development of rail train was the high-speed train. For speeds much above 125 mph, new tracks normally have to be built, because existing tracks have curves which are too tight to accommodate these higher speeds. The trains would come off the rails at the bends, though the maximum speed on curved tracks can be raised to some extent through the use of tilting trains.

Japan showed what could be done with its Shinkansen or ‘bullet train’ which opened for service in 1964 between Tokyo and Osaka. Partly financed by the World Bank, the trains ran on newly-laid track. Running at a top speed of 210 kph (130 mph) this does not qualify as high-speed by today’s standards. A faster network was also constructed from the 1970s in France, known as TGV (Train à Grande Vitesse, i.e. high speed train), and subsequently in Belgium,Germany, Spain and Italy. Average speeds of 170 mph are common, and have since 2000 been matched on new high speed rail lines in South Korea, Taiwan and notably in China. Italy is currently running some new French-designed trains with a top speed of 225 mph


Magnetic levitation (maglev) uses magnets to raise the train a few millimetres above the track in order to reduce friction and to eliminate wear and tear on rail and train alike has been tested. Commercial systems are still in their infancy, although a 19 mile stretch has operated in Shanghai since 2004. The technology carries with it the potential to go very fast. For example, in 2011 the Japanese government approved the first stages of a maglev line from Tokyo to Osaka with a planned operating speed of 300 mph. More exotic still is the possibility of putting maglev trains in vacuum tubes, which would eliminate air resistance and make speeds of several thousand mph possible.

Ownership of the UK railways: 150 Years

Railways began as purely commercial enterprises owned by the proprietors of coal mines. They represented a capital investment that reduced transport costs from the pit-head to the nearest river, canal or port that could take the coal onwards. Early rail systems have either disappeared, or been turned into tourist attractions such as the Talyllyn railway. However, with the development of the steam engine, dozens of limited companies were set up in the UK to exploit the radical new technology, financed by eager members of the public looking for a good return on their savings. Shares in railway companies in the 1840s showed all the characteristics of internet stocks around 1995-2000: wild enthusiasm leading to a speculative bubble, a crash, fortunes made and lost.

During World War I, the railways were run by the government as part of the war effort, and it soon became clear that the economies of scale were such that the railway network would develop faster under less fragmented ownership. Railways were, in effect, a natural monopoly. So after the war, the hundred or so companies with their 19,000 miles of track were merged into just four by an Act of Parliament. Each had a London base, and served the South of England, the West, the North & East, and the Midlands & Scotland respectively. However, the emergence of motorised vehicles resulted in investment in railways to be reduced  as profits were low. From the late 1920s onwards, the rail system shrunk until, by the 1970s, Britain was left with the main inter-city routes and commuter lines into the big cities, and especially into London.

After World War II , the incoming Labour government took into public ownership whole swathes of private industry (nationalisation). Coal, electricity, gas, road haulage and the railways were all subject to compulsory purchase by the government during 1947-49. However, changes in ownership could not alter the underlying advantages of road transport, and the newly-formed British Railways was soon making losses and a poor service reputation.


Rail was returned to the private sector over 1994-97. Its leading exponent was Margaret Thatcher, Prime Minister from 1979 to 1990. During her time as Prime Minister gas, electricity, water, telecommunications, airports, airlines, cars, steel, ship-building, sugar, buses and 2 million council houses were all sold off in a program that was widely imitated around the world. Based on the now-widely-accepted belief that business people almost always run enterprises more efficiently than governments. The railway network was one of the last privatizations in this series, and was carried out under Margaret Thatcher’s successor, John Major.
Separating train and track ownership

British Rail could have been sold off as one large company, or sold off as four regional companies. The latter option would have restored the ownership pattern existing before nationalisation, where four regional monopolies ran independent networks. However, by the 1990s there was a better understanding of the benefits of competition than had existed 50 years before, so the preferred plan was to introduce as much competition as possible. The problem is that the rail network forms a classic ‘network monopoly’ just like water pipes, gas pipes, telephone wires and the electricity grid. The point about these services is that the more people they serve, the cheaper they become to provide per person, so bigger companies will always push out smaller companies until only one is left.


The rail lines were sold off in 1994 to anyone who wanted to buy shares in a new company called Railtrack, while the train timetable was split up into 25 fixed-term franchises for which interested parties were invited to bid. Most of the franchises were awarded over 1995-97 to bus companies like Stagecoach, MTL (Merseytravel) and National Express, or to newly-formed companies whose directors had a bus industry background, like Prism Rail.6

Privatisation was completed in 1997, just before the arrival of an incoming Labour government, which had threatened to halt it. The current system, therefore, has three main parts
The track itself, owned by a single company. First this was Railtrack, now Network Rail.
Train Operating Companies (TOCs) run the trains on defined parts of the network on a franchise basis for limited periods.
The trains themselves  are owned by three rolling stock companies, known as ROSCOs. They are Angel Trains Ltd, Eversholt Rail Group and Porterbrook Leasing Company Ltd. The ROSCOs lease out their trains to the TOCs.

Labour, in power from 1997 to 2010, was opposed in principle to a national asset – the rail network – being run for private profit. When four people were killed in the Hatfield rail crash of 2000, caused by an inadequately maintained track, Railtrack was held to account. A very expensive program of track maintenance was imposed on Railtrack, together with over 1,200 emergency speed restrictions across the network.

The company never recovered financially from this setback, and was replaced by the government in 2002 with a state monopoly called Network Rail. Network Rail is a ‘not-for-dividend’ company, and any profits it makes must be ploughed back into the rail network. Effectively, it is a branch of the government. It operates under supervision from ORR (Office of Rail Regulation).

The current market structure of UK rail travel
A Government-controlled network monopoly of rail tracks on which rival train operating companies compete for franchises over 19 defined regions. The ORR is a government department, with 300 staff and an annual budget of £18 million, and is responsible for the efficient and safe running of the rail network and for competition issues.9 An example of the way this works is provided by the fine Network Rail is currently facing (September 2012) for failing to hit agreed targets for improvements in train punctuality.10 Competition among train operators is generated by holding regular competitions for the right to run trains over 19 defined regions. The bidding process itself is overseen by the Department for Transport (DfT). One example is the recent bid for the West Coast mainline franchise from 2013-2026. New franchisees have to take on all the employees of the former franchisee, employment rights are protected: the employees simply switch uniforms. Furthermore, there is no competition in the running of the rail network itself, with Network Rail operating as a monopoly. It may be that this is unavoidable, as there is a strong argument for saying that the rail network is a natural monopoly. That said, prior to 1947 the train companies ran the rail network too, and this gave them an incentive to reduce costs, which may be absent from Network Rail. The government is currently proposing to break up Network Rail into regions, so that each part may be benchmarked against the others

In conclusion, the current market structure of rail travel may be the best that can be achieved. While recognising the natural monopoly of the rail tracks themselves, there has been a serious attempt to generate competition among train operators. The current system also lends itself to increased competition from overseas operators. The Financial Times reports that the “rail sector is facing unprecedented turnover in operators as more than half of the franchises are due to be renewed in the next three years. The four listed UK transport groups – FirstGroup, Go-Ahead, National Express and Stagecoach – are facing growing competition from foreign-based, state-controlled operators.” Furthermore, the EU has taken the view that this is the ownership structure that it wishes member states to adopt, with the hope of encouraging competition between train companies across the continent.

UK rail travel: Who pays?
The short answer is that UK fare-paying passengers pay 66%  of the cost, with the remaining one-third paid for by the taxpayer, primarily through a government grant to Network Rail.


The London and the inter-city network pay three-quarters or more of their total costs, but the regional services are heavily subsidised to the tune of 61% of total cost. The 31 pence per mile subsidy for regional rail travel is not far off the 40 pence per mile that the tax authorities allowed individuals to claim (in 2010) for using their private cars for business purposes. Alternatively it would be cheaper for the government to close down regional rail travel altogether, and pay former passengers to make those journeys by car instead.

One aspect of the regional rail problem is the sheer number of stations that are hardly used. The least-used 50% of stations in Britain serve just 3% of rail passenger numbers.

The fare-paying passengers pay for the entire running costs of a franchisee, and for their profits. However, the franchisee also pays Network Rail an access charge for using the rail network, but these access charges do not cover the full cost of running the network. The remainder of the cost is, as already stated, paid for by government grant.

Rail fares are divided up into those which are regulated by the government, and those which are not. Regulated fares are allowed to increase each January by the inflation rate (as measured by the RPI the previous July) plus or minus an agreed percentage. It should be noted that these permitted fare increases only refer to the average regulated fare increase, which gives a train operating company considerable discretion to increase some fares by a lot more.


The recent rise in permitted fare increases to RPI + 3% (now withdrawn) was part of the government’s long-term strategy of reducing the amount by which the taxpayer had to subsidise the railways, which was over £3 billion. In fact, the government announced that the new RPI + 3% increase would come into effect from 2012 but got cold feet when the RPI for the previous July came in at a very high 5% pa, which – with RPI + 3% – would have resulted in regulated fares increasing by 8%. Now they have got cold feet and returned the permitted increase to RPI + 1% yet again! These flip-flops indicate how politically sensitive fare increases are.

Regulated fares include saver returns, standard returns and commuter season tickets into the London area. Unregulated fares include all first class tickets and ‘advance purchase’ fares. However, there are practical obstacles in the way of train companies putting up unregulated fares by whatever they like. In particular, if a train company has been told what to charge for a standard return.

UK rail travel: Is the industry allocatively efficient?

One of the concerns of economists is that industries should be the right size, relative to each other, so that the net benefit to society is maximised. In competitive industries without significant externalities, the free-market system should produce this result through the ‘invisible hand’ of market forces.

Transport is nowhere near to this ideal, partly because of the natural monopolies formed by road and rail networks, and partly because of the very significant external costs caused by road traffic congestion, and the externalities associated with road traffic.  A move to congestion charging would result in sharply increased costs for commuting by car, leading to a large increase in demand for the substitute, rail travel. This would make possible increases in fares that would reduce or eliminate the need for a rail subsidy from the tax payer. Additionally, it would justify the expense of upgrading the most-used commuter lines to increase their capacity. It may, therefore be the case that the current size of rail network is not far off its allocatively efficient optimum, though some regional lines should probably be closed even as some commuter lines are upgraded. However, on first reading it is difficult to justify the eye-watering £32 billion required to expand the rail network by building the HS2 London-Birmingham-Manchester-Leeds line.

The subsidy that the government has to give to Network Rail is not an indication that the rail network is inefficiently large. Rather, it is a reflection of the weaknesses of democratic politics. Politicians have refused to implement the unpopular but necessary policy of congestion charging on the roads, preferring instead to level the playing field between competing modes of transport by spending tax-payers’ money on subsidies to bus companies and Network Rail. In the process, this has contributed to a national deficit which we are now discovering we can ill-afford.

In conclusion, the optimal solution to congested roads and trains during rush hour has to be an increase in the price of travel during these peak times. The free market will then respond in a number of ways. Home working will increase, as will working staggered hours. New housing estates and new business parks will be built in locations which have been chosen with an eye to the cost of commuting. House-buyers will pay greater attention to the costs of commuting when deciding where to buy. Workers who absolutely must travel along popular routes during rush hour will have to pay more – and companies that wish to retain these workers will need to increase wages to keep them.

The relationship in the UK between roads and rail travel

Bus travel has lost almost half its market share over the past 30 years, rail travel has grown at an average rate of 2% pa, matching the growth in car travel and therefore maintaining its market share, at a modest 7% of all miles travelled. Specifically, rail transport has grown its market share significantly since rail privatization in the mid-1990s.

Rail travel works particularly well on any route where there is a high daily volume of passenger traffic. On such routes, rail is entirely competitive, being often cheaper and quicker than going by car. The problem, of course, is that rail travel is not a door-to-door solution but a hub-to-hub experience. Often expensive taxis or slow buses or long walks have to be incorporated to complete the journey. In a country where 75% of households have at least one car, rail is not competing against car ownership as such. Instead, it has to persuade existing car owners to leave the car at home by offering a compelling time-and-money proposition for specific journeys relative to the car.

Rail travel is, therefore, best viewed as a niche market within the wider transport industry. Its dominant sub-segment are car-owning workers who can afford to live in a town of their choice and for whom the price of the commuter season ticket into London.

Light rail systems cater for travel within a major conurbation, and offer a service similar to buses. Light rail has fewer stations than buses, but offers higher average speeds. The more densely populated the area – and so the more congested the roads are – the stronger is the light rail proposition. Particularly in London, the light rail network (i.e. the Underground) is a vital part of travellers’ overall transport requirements. The same is true in many large cities around the world.

UK rail: Some current debates

One of the criticisms of the current system is that the Department for Transport is no match for the private-sector lawyers negotiating on behalf of the train operators when franchises come up for renewal.

The background is that, in 2009, National Express abandoned the franchise it had won to operate the line saying that, because of the recession, it could not afford the franchise payments it had promised to make. The then-Labour government took it back into public ownership.

In deciding whether or not to proceed with HS2, the government has factored in the external costs associated with degrading green spaces. Campaigners against the line have discovered, by using a Freedom of Information request, that the government has recently reduced its estimate of this cost by 78%. “In the official 2010 assessment of damage to the landscape, it emerged that the estimate by HS2 Ltd which is building the line, was £4.3 billion. But new figures reveal that the route's damage would cost £978 million - down 78 per cent.”The Department for Transport claim this reduced figure reflects the extra tunnelling put in to make the route quieter. The opposing campaigners claim this reduction has been implemented to bolster the case for building the line.

Rail freight is growing in common transport methods which include open wagons for bulk goods like coal, and the transport of standard containers. In terms of energy used per tonne per mile, rail is around three times more efficient than trucks with one gallon of fuel moving a tonne of goods 246 miles by rail but only 88 miles by road. In the United States, Russia and China, with many journeys of over 1,000 miles, rail freight has a better chance of being part of a truck-train-truck chain that delivers a lower-cost solution than simply driving a truck the whole way.

Nonetheless, in 2011-12, UK rail freight transported 101 million tons of goods with a value of over £30 billion. Like rail passenger journeys, rail freight has enjoyed a renaissance since the mid-1990s with rail freight activity up by 65% between 1995-96 and 2006-07.

The cost structure of rail travel

Inter-city railway lines are expensive to build and cannot generate any income until substantial routes have been completed in their entirety. In the late nineteenth century, railway networks could be built by private enterprise on a commercial basis, since they represented a genuine and transformational reduction in journey times compared to the previous fastest methods. However, since the early 20th century any new line has to face competition from the car and, on longer journeys, the aeroplane. State financing has, therefore, been the normal way of getting new railways built all over the world. The only recent privately-financed rail venture in the UK has been the Channel Tunnel, built over 1988-1994. It has not been a good advertisement for the private financing of rail infrastructure. Coming in at 80% over budget, it has been a financial disaster for the initial investors.

Where, as in the case of the USA, state financing has not been forthcoming, new lines have simply not been constructed. Instead, they have been built in centrally planned and mixed economies where governments have been prepared to take a strategic view, rather than simply look at immediate profits and losses. On the one hand, this may include faster economic growth than would otherwise have taken place. More recently, it may also include a reduction in carbon emissions as travellers and freight switch from the less-environmentally-friendly alternatives of road and air travel.

There is no doubt that high-speed rail systems do have the potential to take market share from road and air. When the French TGV reduced the rail travel-time between Paris and Lyon from four hours to two, their passenger market share increased from 49% to 72% while the airlines’ share shrank from 31% to just 7%. Similarly, the high-speed link between Madrid and Seville increased rail’s share from 16% to 52% while airlines’ share shrank from 40% to 13%. Much of the increase comes from offering a service that generates new journeys which would not otherwise have been undertaken.


While the UK rail network as a whole is loss-making, it remains the case that it costs nothing to fill an empty seat on a timetabled train.  This means that train companies have an incentive to fill off-peak seats which would otherwise remain vacant – even if this means selling them at very much reduced prices.

There are at least three ways this is done:
1. Selling tickets in advance. By offering lower prices in return for advance booking and travel-time inflexibility the rail companies have tapped into a creative method of price discrimination.

2. Selling rail cards. Typically these offer one-third price reductions for off-peak travel for those aged under 26 or over 59, or travelling with children. These market segments are unlikely to be compelled to travel for business purposes, so their demand for travel is likely to be price elastic. Once again, this is a method of maximising profits through price discrimination.

3. Allowing ‘ticket-splitting’. It is perfectly legal to buy two tickets for a single journey provided your train stops at the intermediate station.

By contrast, train companies have no incentive to offer discounts on commuter travel, where trains are filled to capacity with passengers who absolutely have to go to work. These prices are the most expensive per mile in Europe. For example, buying a yearly season ticket to London from Swindon (a commuter town 70 miles to the West of the capital) currently costs over £7,400 pa. Nevertheless, this is still cheaper than making the journey by car every working day. If the train is used 250 days a year, the 140-mile round trip ends up costing 21 pence a mile, which is well under the cost of running a car.

International rail: The biggest players

With 141,000 miles of track, the USA still has the world’s biggest rail network, though it has shrunk from its peak of 255,000 miles. The network relies heavily on freight, with passenger rail being confined to a dozen or so commuter networks into big cities and Amtrak’s passenger service in the North-East of the country between Boston and Washington DC. The freight network received a vote of confidence in 2009, when legendary investor Warren Buffet splashed out £26 billion to purchase the second-biggest freight rail network, Burlington Northern Santa Fe.

With large population centers situated thousands of miles apart, air travel has become the dominant form of passenger transport over long distances. Over shorter distances, America’s love affair with the automobile, and an unwillingness on the part of government to invest in rail infrastructure, has meant that the US has never developed a passenger rail network remotely comparable to that of Europe.

While America’s rail passenger provision is non-existent over most of the country, this may well be the allocatively efficient outcome. Free-market capitalism does not guarantee the survival of any one particular transport mode, and the USA’s low tax rates are in part a reflection of the government’s refusal to get involved in grandiose transport projects that are never going to be commercially viable.

The strictly commercial nature of America’s railways is also evident in their reluctance to embrace new technologies unless they can be shown to make a profit. Hardly any of the rail network is electrified, relying instead on diesel. Electrification reduces CO2 emissions but otherwise has very little to recommend it.

The BRIC economies are well-represented in the list of countries with the longest rail networks, starting with Russia on 50,000 miles of track. The most famous line, the Trans-Siberian Railway, was built over the 25 years prior to World War One. This was in many respects the golden age of rail, before the automobile became the dominant mode of transport. The network was greatly expanded after the Russian Revolution of 1917 as part of the new Communist government’s push to achieve rapid industrialisation.

Following the collapse of the Soviet Union in 1989, the rail network was split among the new countries that were formed, of which Russia was by far the largest. Currently employing around 950,000 staff, the network is in a poor state of repair with the government unwilling to pay for its modernization.

Passenger rail travel has been around for over 150 years, and many of the lines built over a century ago are still in use. The relatively low running cost of rail travel in a country with low wages has protected the network from becoming obsolete. This is particularly true of India, with its vast population of 1,200 million, most of whom are relatively poor and who therefore do not own cars. It currently has 71,000 miles of railway lines in use of which 40,000 were constructed before 1930 when the British ruled India.

With over 1.4 million employees, the state-owned Indian Railways earned $19 billion in 2011-12 – roughly 70% from freight and 30% from passengers. Over the course of a year it carries 7.5 billion passengers – more than one journey for every human being on the planet. Passenger fares are kept deliberately low, and currently this section of the enterprise is being run at a loss. The network is being slowly electrified, with 34% coverage achieved as of March 2012.

Whereas rail travel in America, Russia and India relies essentially on a network completed some decades ago, the Chinese network is in a phase of explosive growth. With 50,000 miles of track at the end of 2007, this is expected to grow to 68,000 miles by the end of 2012. Rail is the dominant form of long-distance travel within China, and the existing network is the most densely-used in the world. Each mile of track carries more freight and more passengers than any other network. In 2011, the system carried 600 billion passenger-miles and 1,800 billion tonne-miles of freight.

China was the last major user of the steam engine, with some surviving in regular commercial use up until the 21st century, although now (as in the UK) they only operate as tourist attractions. However, China is in the process of becoming a world leader in the implementation of high-speed technologies. China’s first high-speed railway opened in 2007, yet already by 2011 it had the largest high-speed network of any country with 5,000 miles of track and much more still in the pipeline. China’s rail development is just another example of the sheer speed and size of China’s industrialisation over the past 30 years.

Chapter 2-Linking rail transport to the Unit 4b specification

Allocation of Resources: 
The right amount of rail transport is needed relative to the amount of other transport modes for ‘optimal allocation of resources’ to be achieved. In those cases where the free market does not achieve this outcome, then ‘market failure’ has occurred.

Public Good
A public goods is something which a free market will not produce at all.
The rail network is not a public good since access to it can be effectively controlled through ticketing and barriers. However, because one of its substitutes – road transport – is a public good. If road transport is over-utilised due to drivers  not paying the full external costs of the congestion they create, rail transport can become under-utilised.

Merit Good
These have a private benefit to the buyer, so entrepreneurs will  produce the good or service. But there is also an external benefit, which neither buyer nor seller has an incentive to take into account. So the free market’s allocation of resources to industries producing merit goods will be too small.
In the case of rail transport, it may be viewed as a merit good. Train use reduces congestion on the roads. However, if private cars are a ‘demerit’ goods because of the external costs they generate, then the appropriate response is to tax their use. This will cause a switch to rail transport without the need for an additional subsidy for the rail network. Rail transport does not produce an external benefit in its own right.

Demerit Good
A demerit good produces a private benefit but an external cost. This time, it is the external cost which neither buyer nor seller considers, so the free market allocation of resources to these industries is too large to be optimal and therefore mirrors a merit good.
While rail transport is probably a merit good, there are some external costs associated with its use. These are some CO2 emissions from diesel-powered trains than electrified ones and also some deterioration in property values of neighbourhoods around London’s main railway stations such as Paddington and Kings Cross. These have become associated with prostitution, a sure means of driving down house prices.

Social costs and benefits

In the rail transport, the private cost would be the cost of buying the ticket, the external costs of rail travel are relatively small: some CO2 emissions but less than the alternative of travel by car. Equally, the social benefits of any product are the sum of the private benefits that the individual gets through travelling by rail and the external benefits which other people receive.

Externalities
Such external costs in the rail industry are the economic aspects of it, whereby there is a possibly unwise investment in prestige projects-The HS2. The social aspects through more long-distance commuting creating ‘commuter towns’ with few social activities, and the environmental aspects whereby there has been a decline in property values around main rail stations. However the rail industry has produced some external benefits within the economic area through there being an increase in economic activity near rail stations. Social benefits of greater ability to visit friends and family in other cities and the environmental benefits of a reduction in CO2 emissions, if travellers substitute out of cars and into trains.

In regards to the HS2 project there will be a generation of external benefits near its few stations as companies are attracted by faster travel to London. However, there will be considerable external costs along its route in the form of increased noise and loss of natural landscape. Other major rail construction projects, will have many external costs which will be ‘front-loaded’. The actual building works will cause considerable disruption. However, the external benefits may last for decades to come. For example, we are still enjoying benefits arising from the mid-nineteenth century construction of the UK rail network.

Cost-Benefit analysis
The HS2 has been the subject of repeated cost-benefit analysis. The key benefit-to-cost ratio (BCR) was estimated at 2.9 back in 2010, meaning that for every £1 spent almost £3 of benefit would be forthcoming. However, the DfT’s latest calculation in April 2012 almost halved this figure to 1.5. Even this figure assumes that every one hour saved in travelling time is worth £37-00, which may well be much too high.

Controlling Externalities by legislation, regulation
For any demerit good, the government may use legislation to reduce the quantity consumed towards its optimal level. Legislation can equally be used to increase the quantities of merit goods consumed. In the case of rail transport, the government has used its powers where possible to create a favourable legislative environment.
1. Planning permission. Compulsory purchase orders are used to buy up the land necessary to construct new rail lines.
2. Minimum timetable requirements. When train operating companies bid for rail franchises, part of the agreement is that they run a minimum specified number of trains on their part of the national rail network.
3. Inter-operability. New rail infrastructure projects such as High Speed 1 (London to the Channel Tunnel) and the proposed High Speed 2 (London to Birmingham and beyond) have to be built to EU dimensions, so that EU trains are capable of travelling on new parts of the UK network.

Another way of increasing the consumption of merit goods is simply by offering a subsidy.
This shifts the supply curve outwards, increasing the equilibrium quantity at the same time as reducing the equilibrium price.
A number of subsidies encourage rail travel:

Subsidies to Network Rail and the train operating companies (TOCs)
In the case of rail transport, the annual subsidy paid to Network Rail (together with price control on rail tickets) maintains a network that is larger than would be the case in a free market. Additionally, train operating companies are paid subsidies to run some regional services that do not attract enough traffic to pay for the train services themselves, never mind the track on which they run.

Subsidies to specific groups of travellers
All train operating companies have to honour the discounts available on national travel cards. Those aged 16 to 25, or over 59, or travelling with children are all eligible for cards offering one-third off rail fares.

Payment by government for new infrastructure projects
Both High Speed 1 (London to the Channel Tunnel) and the proposed High Speed 2 (London to Birmingham and beyond) are government-funded projects. The same is true of CrossRail, the new East-West line across London currently under construction, and the upgrades been undertaken on North-South London travel under the name of Thameslink.

Effectiveness of various policies to control externalities
For rail transport, it's difficult to put a figure on the external benefits created by reducing road congestion we cannot tell whether the subsidies given to rail have been set at the optimal level. The rail transport is only a substitute for road transport on the particular routes, notably commuting in the London area and inter-city travel. The proper way to address the external costs of road congestion is by tackling it directly through a comprehensive road pricing scheme.

Control of externalities by tradable permits
Tradable permits limit access to a common resource – typically the atmosphere or fisheries or water.
Essentially, tradable permits use regulation rather than taxation to control the absolute quantity of external cost generated – but does so in a way that seeks to ensure a level playing field between companies.

Protection of Consumers

Monopolies and oligopolies with monopoly-like powers are regulated for their raising price above competitive levels which results in a less-than-optimum size of  industry, with market failure caused by some units of output that could be produced at a profit are not produced, so that the monopolist can make even greater profits on the remaining units. Secondly, the increase in price directly transfers resources from the consumer to the producer. Therefore monopoly pricing increases inequality.

Transport, including rail transport, is particularly prone to the formation of monopolies because of what are
known as ‘network effects’. In the case of the rail network, it is owned by a government body called Network Rail. The traditional form of abuse of monopoly power is overcharging for the service. However, this option is not open to Network Rail as the government controls rail fares and this in turn limits the amount the train operating companies pay Network Rail. However, it is still possible that the management of Network Rail abuses its monopoly position by being lazy and allowing costs to rise. The people who ultimately pay for any inefficiencies in the way Network Rail operates are not rail travellers but the taxpayer, who picks up the bill for the large subsidy Network Rail receives to cover the costs of maintaining the track.

Cartels, collusion, restrictive practices
There is a strong incentive for competitors in a market to band together and act like a monopoly i.e. restrict their output, raise their prices and stop competing with each other. Such an arrangement is called a cartel. The making of a secret arrangement like this is called ‘collusion’, and is one example of a ‘restrictive practice’ i.e. any arrangement to limit the level of competition within an industry.  Any such anti-competitive agreement is illegal under Article 1 of the UK’s Competition Act of 1998. Also illegal (under Article II) is any abuse of a dominant position within a market. This covers such actions as a refusal to supply certain customers (or to discriminate between customers), or the exercise of ‘buyer power’ towards suppliers.

Issue of natural monopolies 
In some circumstances it is impractical for an industry to have any structure other than that of a monopoly. Such an industry is called a ‘natural monopoly'. A big company can always produce goods more cheaply than a smaller rival, so that before long only one company is left. Natural monopolies have a high fixed cost – examples are the building and maintenance of pipe, cable or rail networks to carry gas, water, electricity or roads. Once the basic network is set up, then the more people who buy the service, the cheaper the unit cost of delivery will be. However, the ability of the Network Rail to abuse its monopoly power is limited by two features. On the one hand, rail fares are at present capped by the government, and rail users have so far proved effective in lobbying to prevent large fare increases. On the other hand, road transport acts as an alternative to rail travel should rail fares become too high.

What the government does-Role and uses of the Office of Fair Trading (OFT) 
Established in 1973, its strap line is “making markets work well for consumers”. At one level this involves
publishing advice to consumers and enforcing consumer protection law in conjunction with Local Authority
Trading Standards. With larger companies, the OFT might investigate possible criminal cartels and has the power to levy substantial fines. It also investigates potential mergers and may refer them to the Competition Commission if it thinks the proposal raises competition issues.

Transporting coal by rail
With regard to the rail industry, the OFT acts together with the Office for Rail Regulation (ORR). The ORR
normally takes the lead in competition matters. In 2006, it found that the main provider of coal freight
services by rail, the English, Welsh and Scottish Railways Ltd, had operated exclusive long-term supply
contracts with power stations in order to freeze out competitors. It was fined £4.1 million.

Transporting oil by rail
The ORR’s most recent competition investigation (in 2010) was into whether a contract between DB
Schencker rail freight and Conoco Phillips Ltd to transport petroleum was fixed at such a low price as to
amount to predatory pricing. The ORR found that this was not the case, and that DB Schencker had operated in a properly competitive manner.

Role and use of the Competition Commission
The CC conducts in-depth inquiries into mergers and markets. If the OFT has doubts about whether a proposed merger is in the public interest, the matter will be referred to the CC. The CC will then investigate the merger and either disallow it, or allow it - with or without conditions attached. In each case, the test used is whether there might be a Substantial Lessening of Competition (SLC) as a result of the merger or acquisition going ahead. With respect to markets, the CC will on occasion conduct an in-depth investigation into a particular industry, again to see if it is operating competitively in the public interest. The CC has had a number of cases referred to it with respect to rail transport:

Acquisition by First Group plc of Great Western rail franchise in 2006
The CC has had a number of referrals made to it when bus companies acquire rail franchises. The danger is
that competition will be lessened because, if the one company owns overlapping bus and rail routes, then there will no longer be competition between these competing forms of public transport. However, the CC found that passengers were using buses and trains in the Great Western area at different times and for different purposes. It therefore concluded that there was little effective competition between the bus and the rail routes anyway, and that therefore the acquisition would not substantially lessen competition.

Acquisition of Sea France ships by Eurotunnel
Transport on the Dover-Calais route across the narrowest part of the English Channel was provided by
Eurotunnel (operating the Channel Tunnel) and two main ferry companies, Sea France and P&O. Sea France closed down in January 2012, and its three ships were purchased by Eurotunnel and commenced sailing from August 2012 under the name MyFerryLink.
The OFT referred the acquisition to the Competition Commission in October 2012. The grounds for
investigation are that the OFT was concerned that this would reduce the number of competitors on the route
from three to two. It would not have been a problem if a third party had bought the ships instead. The
Competition Commission is due to report on the acquisition by April 2013. If it takes the view that the
acquisition will result in a substantial lessening of competition, then it will force Eurotunnel to sell the ships it has bought.

Role and use of the EU Competition Commission 
The EU has its own competition law, which focuses on the behaviour of companies. There is no equivalent of
the background work done by the OFT’s and CC’s Market Investigations which analyse a whole industry.
Article 81 of the 1997 EC treaty prohibits agreements between two or more firms which restrict competition,
such as cartels. Article 82 prohibits firms in a dominant position from abusing that dominance, for example
by predatory pricing.

The market structure of the EU’s railways
Evidence D  to the EU’s overall rail transport policy, including the objective of facilitating “increased international competition”

Proposed joint venture between Italian and French train operators: July 2011
The EU Competition Commission approved a joint venture between the Italian rail operator Trenitalia and the French rail and bus operator Veolia Transport. They proposed to run high speed trains on the Paris-Rome, Paris-Venice and Paris-Milan routes. The joint venture was approved because Veolia Transport does not currently run any trains on these routes, so competition would not be reduced. Furthermore, increasing this kind of multinational co-operation between EU businesses is one of the political objectives of the EU.

Use of regulatory bodies 
The Department for Transport, with its £12.7 billion budget, is the lead government body dealing with
rail transport, it is not the only one.

The Office of Rail Regulation (ORR)
The ORR licenses train operators to run trains on the rail network, and is responsible for health and safety
issues. It is also responsible for competition issues in rail transport, together with the OFT. However, its main responsibility is to supervise Network Rail, which runs the natural monopoly constituted by the rail tracks themselves. The ORR has the power to fine Network Rail if it thinks it is failing to meet its responsibilities.

Network Rail
Network Rail “runs, maintains and develops Britain’s rail tracks, signalling, bridges, tunnels, level crossings, viaducts and 17 key stations”. It describes itself as “private company operating as a commercial business”, but it is not allowed to pay dividends. Effectively it is a government quango, trying to operate to commercial standards.

Transport for London
Is operated by the Mayor of London, and has responsibility for managing London’s buses, Underground, Docklands Light railway, Overground, and the congestion charge. Transport is more of an issue in London than anywhere else in Britain due to the size and density of the population.

Provision of legal framework and consumer protection 
Both the OFT, the CC and the EU competition authorities seek to protect consumers by ensuring that markets are competitive. In the field of transport, one of the main issues surrounding consumer protection is physical safety. Rail travel is much safer than car travel, and both have become vastly safer over the past 50 years. In the year to July 2012, just four rail passengers died in accidents, all at stations. By contrast, there were 1,850 fatalities on Britain’s roads. For any given journey, travelling by rail is about 30 times (123/4) as safe as travelling by road.

Consequences for businesses 
The intervention of government in defence of the public interest has profound consequences for business. Unethical businesses, which form cartels to restrict competition or impose unreasonable charges in the ‘small print’ will find their business opportunities reduced.
In the case of the rail industry, the degree of regulation is high, even by British standards. The only way to
make money operating trains is to win one of the rail franchises, and simply submitting a bid costs millions of
pounds. In addition, political as well as business skills are needed. When it was announced that Richard
Branson’s Virgin trains had lost the West Coast franchise in August 2012, it was subsequently reported that the DfT might have been motivated by a preference for “anyone but Branson”, based on a dislike for “the firm’s maverick approach”.In this respect, doing business on Britain’s railways has similarities to doing business in China where the strength of the company’s connections to government officials is just as important as more traditional business skills.

The effects of these policies and the implications for business-Effectiveness of policy, government failure and reasons for it 
Key to the justification for government intervention is the concept of market failure, we should not expect governments to be immune from failure either. Elections every 4 to 5 years provide some competitive threat to keep governments on their toes. In political terms we are faced at national level with an oligopoly between Conservatives, Labour and the Liberal Democrats – a market structure which, in a business context, would be frowned on by the competition authorities. And in many local authority areas just one party has been in power for generations with no effective competition whatsoever. We should therefore balance the concept of market failure with that of government failure. The recent bidding for the West Coast franchise is one such example of government failure, with a £40 million price tag attached. As reported in The Scotsman:

The Department of Transport scrapped its decision to award the 13-year franchise to Aberdeen-based First
Group and not the incumbent, Virgin Trains, which is part-owned by Stagecoach. Estimates suggest the
taxpayer will be landed with a bill of more than £40m to pay back the companies’ tendering costs. Patrick
McLoughlin, the new transport secretary, who took over from Justine Greening, said of the department’s
blunders in auctioning off the West Coast rail franchise: “It’s embarrassing, it’s deeply regrettable and
basically it’s unacceptable.”

CAN THE GOVERNMENT CONTROL THE ECONOMY?
Introduction 
The annual percentage change in real GDP measures the economic growth rate. The policy aim here is a ‘high and stable’ growth rate. The UK has averaged a growth rate of 2 to 3% per annum over the past 60
years with little change in the long-term rate of growth. We have suffered recessions in 1974-5, 1980-81, 1990-92 and 2008-2009.
The 1950s and early 1960s were called the era of ‘stop-go’ economic policy. Inflation and economic growth moved against each other as the Conservative governments of the day first expanded the economy to reduce unemployment and then contracted it to reduce inflation. The late 1970s to the early 1990s are sometimes known as The Great Inflation, an era when successive governments forced the UK economy into 3 recessions in an ultimately successful attempt to get inflation down. Then 1993-2007 has been called the Goldilocks economy – not too hot, not too cold, but just right. A more prosaic name is The Great Stability, the name reflecting the remarkable consistency of both inflation hovering around the ideal 2-3% pa range and economic growth clocking up a steady 3% a year. This era came to an abrupt end in 2008 with the start of the most recent recession, which recorded the sharpest decline in UK output since World War II.

Government demand management: what it is and how it works 
Following the work of the economist John Maynard Keynes in the 1930s, governments have realised that they have the means to control the total amount of demand in the economy, known as Aggregate Demand (AD). Once a government has control of AD, then it has a tool for avoiding excessive inflation or deep recessions – but not both at once. The deliberate control of AD in this way is known as ‘demand management’. By shifting AD outwards  it is possible to increase real GDP.

Fiscal policy: what it is and how it works 
Fiscal policy describes the government’s actions with respect to taxes (T) and government spending (G).
What JM Keynes noticed in the 1930s was that G had become such a major part of all spending (i.e. of all
AD) that it was possible for government to make a major impact on AD simply by changing the level of its
own spending – or indeed the level of taxes that it raised. Any increase in G or any reduction in T would be
expansionary. An increase in G would expand AD directly, while a reduction in T would expand AD
indirectly by leaving consumers and businesses with more of their own money to spend. Of course, in either
case the government would be operating a budget deficit because its spending (G) would become greater
than its source of income (T). But since governments can borrow large amounts – up to a point – very
cheaply this was not thought to matter. Such an approach is known as ‘expansionary fiscal policy’. The
reverse entails either reducing G or increasing T, and is likely to create a budget surplus. This is known as
‘contractionary fiscal policy’.

However, since 2010 the government has faced a difficult trade-off in its objectives for demand management. On the one hand, the economy is still producing a long way below full capacity as a result of
the recent recession. This suggests we should use expansionary policy. But on the other hand, the UK
National Debt has risen as a percentage of GDP to levels not seen since the aftermath of WW2. This has
come about as a result of expansionary fiscal policy over 2000 to 2007 (when the economy was not in
recession) in pursuit of social objectives revolving around reducing child poverty and improving educational
and NHS provision. Such a high proportion of the government’s revenue is now being used to pay the
interest on this debt that this suggests that contractionary fiscal policy would be more appropriate.

Monetary policy: what it is and how it works 
Monetary policy is concerned with the amount of money in the economy. This is known as the money
supply (MS). It is also concerned with the price of money – that is, the interest rate (r). When the rate of
interest rises, firms and individuals that need to borrow money before they spend it find that borrowing has
become more expensive. As a result both firm’s expenditure (Investment – I), and individual spending
(Consumers’ expenditure – C) fall. Since these two items account for the majority of AD, the impact of the
interest rate rise is contractionary – AD shifts inwards. Equally, a fall in interest rates has the opposite
effect. It is expansionary and AD shifts outwards.

The great advantage of using monetary policy as a means of demand management is that changes in
the interest rate have a general impact across most sectors of the economy whereas fiscal policy inevitably
has to operate through particular sectors of the economy. The Bank of England was entrusted with demand management by theLabour government when it came to power in May 1997, and was given one – and only one – target to hit.That target was the inflation rate, and it was told to hit a target of 2.5% per annum. The actual decision on interest rates is taken every month by the Monetary Policy Committee (MPC), consisting of the Governor of the Bank of England (currently Mervyn King), four other senior officials at the Bank, and four outside experts appointed by the Chancellor.

Ever since 1997, the Bank of England has been allowed a 1 percentage point margin of error in the inflation
rate. Only if it goes outside this range does the Governor of the Bank of England have to write a letter to the
Chancellor of the Exchequer explaining why this has happened and how the Bank intends to get inflation
back within target. Remarkably steady inflation since 1997 made it unnecessary to write such a letter until booming global commodity prices in 2007 ushered in a period of inflation instability, which is still going on. Letters between the Governor and the Chancellor have become a regular occurrence.
The use of monetary policy may be illustrated by the rapid reduction in Bank of England interest rates from
5% pa in April 2008 down in a series of 6 steps to just 0.5% in March 2009, where they have stayed ever
since. Such expansionary policy was designed to help Britain out of the recession, and in this sense it
worked. However, the danger of this approach was that the Bank took its eye off its primary duty, which is
to keep inflation within a 1 percentage point of its 2% per annum target. CPI inflation was 5.2% in
September, 2011 – way above target. The suspicion is that the Bank quietly downgraded the inflation target
in a failed attempt to ward off a double-dip recession.

Government supply-side policy: what it is and how it works
The economic cycle is always newsworthy, particularly when the UK is in the grip of a recession.
However, the prosperity of the next generation does not depend on the economic cycle, but on the issue of
how fast the UK economy grows over the long term. The question ‘what proportion of our factories, offices
and labour force are currently being used?’ may help to answer the question of where we are in the business
cycle. The deeper question is, ‘at what rate is our supply of factories, offices and labour growing – and at
what rate is their efficiency growing?’ It is the answers to these latter questions that will determine our
prosperity ten or more years ahead. Figure 2.7 below gives just a few examples that are of relevance to rail
transport. The key to long-term economic growth is to raise the quantity and efficiency of inputs i.e. to
increase the ability of the economy to supply goods. This is why these policies are called ‘supply-side’
policies.

The effectiveness of government action-Effectiveness of policy and the difficulties in controlling the economy
The inflation rate was kept within relatively tight limits of 1 to 5% per annum between 1992 and 2010. This was an unprecedented achievement, longer than the previous run of low inflation over 1953-1968. Factors which make it difficult to control the economy include:

Imperfect information
Despite the vast improvements in the quality and reliability of information available to the government over
the past 100 years, and particularly since the advent of the computer age, it will always be the case that no one knows exactly what is happening at the moment – in economic terms as much as any other. This can be
illustrated by a Bank of England fan chart showing projected GDP growth below 0.6

Imperfect understanding
There is still a lot about the way the economy works that economists simply do not understand. Difficulties in controlling the economy: short-term and long-term. For example, increased spending on HS2 may slow down rail travel in the short-term if money is diverted from more immediate maintenance projects, as suggested in Evidence F. However, in the long-term it might be the catalyst that shifts a significant proportion of inter-city travel onto the railways.

Difficulties in controlling the economy: global trends
The UK is an open economy with imports accounting for 34.0% of GDP in 2011.
One of the arguments the British government is using to justify increasing its contributions to the IMF (which may then lend the money to euro zone countries, to prevent default) is that if euro zone countries default on their debts then they will suffer a severe recession, and this will pull Britain into a recession too
The same difficulty of controlling the economy is evident in rail transport. e.g. giving contracts for the new rolling stock to Bombardier in Derby is limited by EU legislation forbidding favorable treatment of domestic suppliers.

Difficulties in controlling the economy: shocks
An economic shock is an unexpected event which has a significant impact on our financial systems. The
most significant recent shock is undoubtedly the banking crisis, whose origins lie in the bad debts American
banks and mortgage providers racked up over the past decade in response to US government insistence that
a proportion of mortgages they offered were given to low-income households.

In the rail industry, the biggest recent shock was the Hatfield rail crash of 17th October 2000. Four people were killed in an accident caused by faulty track maintenance. As a result, the new owner of the rail
network – Railtrack – was compelled to put in place a series of speed restrictions and an expensive
maintenance program which bankrupted the company the following year and led to its replacement by the
not-for-profit Network Rail.

Difficulties in controlling the economy: trade-offs
A ‘trade-off’ is any situation where if you have more of something you have less of something else. The basic economic concepts of scarcity and opportunity cost imply trade-offs. Goods are scarce.
If, individually or collectively, we want more of one product then we have to have less of another. In terms of macroeconomic policy there are trade-offs as well. In the short-term at any rate, there is a tradeoff between unemployment and inflation. It is always possible to reduce unemployment in the short term by increasing AD, but this is likely to increase inflation.

Trade-offs are also evident in macroeconomic policy, as the current government seeks to achieve at least
three objectives: a) reduce the size of the National Debt, b) increase the rate of economic growth, and c)
reduce inflation towards the 2% pa target. The simplest way to reduce the National Debt is for the
government to spend less money – contractionary fiscal policy.
Yet to increase the rate of economic growth in the short-run involves expansionary policy of some sort. interest rates cannot be reduced as they are already at their lowest level since records began in 1694 at just 0.5% pa. The other way to implement expansionary monetary policy is to put more money into circulation – ‘Quantitative easing’. However, this carries with it the risk of increasing inflation.

One trade-off facing the government with respect to rail transport is deciding whether to press forward with
the £32 billion HS2 line from London to Birmingham and beyond. On the one hand, it will only add to the
government deficit, which the government is trying to reduce. On the other hand, it will radically improve
the nation’s transport infrastructure, which is one way of increasing the long-term economic growth rate.

Effects on business, profitability and competitiveness
Fiscal policy has a direct impact on businesses with many listening anxiously to the annual budget
in March to see if the taxes paid by themselves and their customers are going to go up or down.
Rail fares have escaped increases above the RPI + 1% formula, but this has only been because the government has backtracked from a proposed new regime of RPI + 3% in the face of a determined traveller backlash.

SHOULD GOVERNMENT INTERVENE IN SOCIETY, AND WHAT EFFECTS WLL
IT HAVE?
Why the government redistributes wealth-Equity and equality
One of the distinctive features of rail transport is that it is not cheap. The daily train commuter going into
London, or the business person making Inter-City trips would not be making those journeys without a regular salary. In contrast to bus services, where the average user has a below-average income, there is little in the way of an ‘equality’ argument to favour government support for rail services. Nonetheless, the national rail card scheme, which gives one-third off most fares for age groups 16-25 and over 59 is one way of reducing inequality by offering lower fares to those less able to afford them.

Causes of inequality
1. Genetics

2. Upbringing

3. Chance

4. Personal preferences and personal responsibility as an adult

5. Discrimination

As already mentioned, there is little connection between rail travel and inequality because rail is not a
particularly cheap way to get around.

Impact of inequality and poverty on the economy
The standard argument against inequality from a macro-economic perspective is that the principle of
diminishing marginal benefit means that there is more benefit in total if income is equally shared out.
On the other hand, there is an argument that claims that inequality is good for economic growth because if government does nothing to redress the inequalities of a free market economy, then people will realise their standard of living depends purely on their own efforts and they will therefore work that much harder. This idea lies behind the claim of an ‘equity-efficiency trade-off’.

On this model, greater equality leads to a loss of economic efficiency. We might, for example, contrast the
relatively slow growth of the welfare-friendly EU countries with the dynamic growth rates of the much less
equal BRIC economies – Brazil, Russia, India and China.

Changing patterns of demand for goods and services
Evidence G and H points to the doubling of passenger rail traffic in the UK over 1994 to 2011. Together with rail privatization in the mid-1990s, this has created business opportunities for a variety of companies. While the newly-formed for-profit monopoly Railtrack closed down following the Hatfield crash, others have done well. In particular, bus companies such as Arriva, National Express and Stagecoach have successfully
diversified into running trains. Equally, the expansion and upgrading of the rail network has provided
opportunities for the rolling stock companies (ROSCOS), and for companies building the actual trains such as Bombardier in Nottingham. Furthermore, increased rail traffic provides a business opportunity for taxi firms as rail travellers complete their door-to-door journeys. Finally, construction companies have done well from the major infrastructure projects such as HS1 and Crossrail, while the possible construction of HS2 provides potential for lucrative contracts for years to come.

However, while rail has been enjoying a resurgence, it is still the case that the vast majority of journeys are
made by road, and that road transport has been expanding too. Over the past 30 years, rail has merely retained its 7% share of total travel while cars have increased their share from 79 to 84% at the expense of the buses.

Regulation and competitiveness
Rail transport is, like so many areas of UK business, heavily regulated by the government. A company’s skill
in dealing with regulators then becomes a key business skill in its own right. This can be illustrated by the
recent bidding for the West Coast main line. The franchise went to First Group in August 2012, only for the
result to be declared null by the DfT when Virgin appealed the outcome. At the time of writing (November
2012), the bidding has not yet been reopened. Virgin allegedly damaged its prospects by making enemies at
the DfT by renegotiating its existing franchise too aggressively in 2006
Industry insiders said Whitehall officials – some of whom had worked for more traditional train operators – disliked the firm’s maverick approach. There was allegedly deep resentment when Virgin renegotiated the terms of the West Coast franchise in 2006 on terms which ‘nailed them to the floor’. ‘Some people in the department felt they were stitched up,’ said one source.

Bidding to run train services is a high-stakes game where the winner lands a substantial contract costing
billions of pounds. The same is true of contracts to build rolling stock, as we shall see in Evidence E. This
puts particular pressure on the companies involved in the bidding. On the one hand they must operate in a
traditionally competitive market where thousands of jobs hang on the outcome of the bid. On the other hand,
good relationships with the Department for Transport are also crucial for business success.