Ifo Viewpoint No. 22: Thank you, England!

Hans-Werner Sinn
Munich, 15 March 2001

Following the example of Margaret Thatcher and John Major, the wave of privatisation has swept over the entire European continent. Driven by the hope of cost savings and price reductions, it received further momentum from the prospects of higher remuneration for executives and from an easier compliance with the Maastricht debt criteria. But regardless of the true motives, consumers have certainly benefited from the privatisation of the telecommunications and electricity industries.

At the same time, the privatisation of the British railways has given us a timely example of how not to proceed. Railtrack PLC, which manages the rail network, has made its stockholders and managers rich, but it has robbed the British public of an efficient infrastructure. It has certainly not managed to keep the railway network intact much less expand it. Why waste good money on it? The consequences of this profit-seeking are apparent in the growing number of disasters reported in the daily news. And it is not even the many accidents that are the main problem but the extremely long travelling times resulting from having to dramatically reduce top speeds for safety reasons. The English railways are no faster today than they were one hundred years ago.

Privatising a state-owned enterprise only makes sense if competition can be introduced. This is possible on the rails but not with the rails. Several railway companies can certainly use the same tracks at different times. If, unlike in England, a co-ordination agency is set up to synchronise the schedules, this could help bring about meaningful competition. But the railway network cannot be split up into parallel routes that compete with each other. Canada has two railway companies each of which owns a single east-west route. This is a possible but not an economical solution. For technical reasons, the rail network is a natural monopoly and it belongs in the hands of the state if an over-charging of customers and an under-usage of the rails is to be avoided.

A private monopoly whose prices are under state control would also not function well since no state regulator would be able to withstand the profit interests of private lobbies and to act in the interests of the consumers. Without competition privatisation makes little sense. The inordinate price increases after the formal privatisation of Deutsche Bahn demonstrate the relevance of the problem.

The rail network is a public good for which there is only limited rivalry of usage. In agreement with the EU white paper on transport infrastructure policies and the principles of economics, only marginal costs should be charged for the use of public goods, marginal costs which comprise the maintenance costs as well as the congestion costs in the form of the mutual obstruction of travellers, but not the construction costs. These marginal cost prices help optimise the traffic flow but do raise sufficient revenues to completely cover the construction costs. Profitability criteria are thus not applicable. A financing deficit in the provision of a railway network is a necessary but of course not a sufficient condition for economically efficient user prices that are to be charged the private railway companies.

It is a good thing that the German Minister of Transport has now decided to cross the plans of Deutsche Bahn AG. It makes no sense to take the national wealth in the form of railway tracks that has been built up over one hundred and fifty years and that lead into the finest inner-city locations, whose true value is immeasurable, and peddle it away on the stock market to private owners for purposes of profit maximisation. Thanks to England, this nonsense has been prevented at the last minute.

For financing the railway tracks, the Transport Minister wants to create a financing agency for transport infrastructure which is also to administer the motorways. The agency will have the power to collect tolls from private motorists and the private train operators and to cross-subsidise the different transport networks. Cross-subsidies do not fundamentally contradict the economic principles of optimal toll fees, and there can be no doubt that an effective regulation of motor traffic is only possibly via tolls linked to particular roads and the time of day. Roads are also public goods, and in providing them financing deficits are to be expected if the toll rates are chosen optimally. Here, too, tolls should only cover the current maintenance costs and the costs of congestion but not the construction costs. In this respect there is no avoiding an on-going co-financing of all transport networks from general tax revenues. Maintaining transport networks is the responsibility of the state - a principle which in no way runs counter to neo-liberal thinking.

Hans-Werner Sinn
President of the Ifo Institute

German original published as "Die Eisenbahn-Trassen gehören in die Hand des Staates" in Handelsblatt (15 March 2001, p.12).