Market Structures And Competitive Behaviour In Transport Market

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Hand-out 11: Privatisation
Specification
Essential for section ‘Market structures and competitive behaviour in transport markets’
Key Concepts

You need to be able to:
Know what privatisation is
Apply to the rail industry

Privatisation

The transfer of ownership of a firm from the public to private sector.

The Rail Industry

When it was privatised in 1996, the rail industry was split into 4 sections:

Infrastructure: Network Rail (NR), owns and operates track, signalling and stations. Revenue comes from charging TOCs for use of the lines and government subsidies. NR is a natural monopoly: economies of scale are so substantial that a single firm can produce at lower unit cost than two or more firms. The McNulty Report 2011 identified an efficiency gap of 30% between NR and top performing European rail infrastructure firms ie NR unit costs are higher
Passenger Operations: Train Operating Companies (TOCs) are private sector firms that run rail passenger services, leasing and managing stations from NR. They have typically won a time limited franchise to supply rail services over given routes to a given standard. TOCs revenue comes from ticket sales and subsidies. They normally lease trains from ROSCOs. Franchising introduces periodic competition to join or remain in the industry. The McNulty Report finds that since privatisation unit costs have shown relatively little improvement and that passenger fares per passenger-kilometre on average are around 30% higher in GB than in Europe.
Freight Operations: Freight Operating Companies are privatised firms that use the rail network to transport goods eg coal. They operate without subsidy in a highly competitive market with intermodal competition from road haulage. The McNulty Report 2011 finds freight unit costs have fallen by some 30% since privatisation indicating productive efficiency gains
Rolling stock companies (ROSCOs) lease out train carriages thereby lowering set up and sunk costs and improving contestability
Advantages:

more firms compete for franchises/raises competition (L2).This lowersfares (basic L3) & raises consumer surplus (good L3). Accept S/D analysis explained (good L3) accept theory of the firm diagrams which explain price/efficiency changes with move from monopoly to competition (L3) allocative efficiency (L2) as private sector firms want to provide exactly those goods and services consumers want (basic L3) or they lose market share/sales (good L3) productive efficiency (L2) as firms produce at lowest possible cost (basic L3) to max. profits (good L3) OR minimise prices (good L3). reduced ‘X-inefficiency’ (L2) as private sector firms want to minimise / reduce costs (basic L3) in order to profit maximise (good L3) OR to lower prices (good L3). private sector may have more incentive to invest OR bigger sources of financial capital OR higher profits (L2) leading to dynamic efficiency gains (L3) OR product innov increased passenger numbers reduce market failure/negative externalities (L2). This reduces allocativeinefficiency (L3).
Raises revenue (L2) which allows government spending in other areas (basic L3) OR reduce taxes (basic L3) OR reduce budget deficit (basic L3)ation / better quality (L3).
Disadvantages:

limited competition with franchise system
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