I took a holiday out to Cornwall in southwest England over the long weekend and travelled on the Great Western Railway, one of the most famous historic train lines in the world (built by Isambard Kingdom Brunel, its gradient is as flat as a billiard table). I was shocked that the train company charged 88 pounds ($140) to go 180 miles (on a SuperSaver fare to boot!). This compares to the 280 miles distance from London to Paris, for which the Eurostar charges only slightly more. This is also despite the fact that the Eurostar has to go through the 5.8bn pound High Speed 1 rail line, the 5bn pound Channel Tunnel, and the 4bn LGV Nord line in France, whereas the Great Western Railway was completed by 1849 for the stretch that I was going on and surely fully depreciated now. Oh, and the Eurostar goes twice as fast and uses trains where the outsides of the carriages don't look like they've been beaten into place by garage mechanics with mallets.
All this makes one wonder why it's so uncompetitive to take public transport to get somewhere in the UK, to the point where one can rent a car and drive for a cheaper price (even with gas costing $7/gallon). Well, it goes back to the way the train lines were privatised in the first place and the subsequent rate increases which have been allowed. The government agreed to fares increasing at an above cost of inflation. This was part of the government's plan to shift the cost of transport more from taxpayers to fare payers. Seems sensible enough on the surface, but then what's the point of privatising the railways in the first place then if you're just shifting costs from taxpayers to fare payers? Plus private companies have to make a profit, so now you have an added cost to bear. And as any UK taxpayer will tell you, taxes have gone up, not down, so you can't say that taxpayers have really benefited.
But really, what I don't think politicians understood is the impact of compounding fare increases at a rate greater than inflation. As any long-term investor will tell you, the power of compounding has the greatest impact of any factor over the long-term. The chart belows shows the impact of this compounding. Basically, while inflation has a little more than doubled since 1987, rail and bus fares have gone up by 350%.
So the UK has most expensive fares overall in Europe, including Norway where I had a pizza for 24 pounds! UK passengers are paying 1/3 more on an inflation adjusted basis than they used to. A walk up fare costing 10 pounds in the UK would cost 7.1 pounds in Norway, 4.3 pounds in Spain and Germany, 2.4 pounds in France, and 1.8 pounds in Italy. Now to be fair, average fair prices aren't as egregiously different, but you get the message. And one really can't say that service has improved, trains at rush hour are up to 80% over capacity (a safety hazard?), and many of the train companies run fewer than half of their service on time.
By the way, why should fares be indexed to inflation in the first place? Isn't the point of privatisation to improve productivity and efficiency, which would mean that prices should increase at less than inflation, i.e. more value for money so one is better off? And what is a private operator's incentive to become more efficient if they are allowed to pass on ALL cost increases directly to fare payers? The airline industry, which is one of major successes of privatisation, has barely raised prices since the late 1970s, not just on an inflation-adjusted basis but on an absolute basis as well (most of any price increase on airline tickets have come from higher airport charges, but that's for another day, another blog). That means that rail and bus fares are now 3 times more expensive compared to airfares than in the 1980s!
My other major criticism is the privatisation process itself. The government is also now awarding tenders for franchises to the highest bidder. On the surface, this seems to make sense, but the result is that firms pay a large upfront fee to the government (this is basically a tax with no benefit to the consumer). The firm then tries to pass on the costs to consumers; if it fails, the firm hands the franchise back to the government, at the cost of the taxpayer.
A couple of years ago, I was talking to the ex-head of a private equity firm, who acquired a major rail franchise during the privatisation process. He said it was one of the most profitable deals they ever did. Now a private equity firm is suppose to earn 20%+ returns, so you have to wonder what type of returns that they got if it's one of their best deals ever. But if you're the government and you have a private equity firm which needs to earn 20%+ returns knocking on your door wanting to buy a rail franchise, doesn't that make you think that perhaps the prices you've set for fares may be a bit too high? I posed that question to the guy, and he said what made the deal so great was that the fares were set as such a favourable level; they also bore virtually no risk and got all the upside. I asked whether they needed to make the railway more efficient to generate their returns, to which he commented that there wasn't a need as they could pass the costs on to consumers. That rail franchise happened to be the Great Western Railway! So there is such a thing as a free lunch...it's called the UK government.
All this makes one wonder why it's so uncompetitive to take public transport to get somewhere in the UK, to the point where one can rent a car and drive for a cheaper price (even with gas costing $7/gallon). Well, it goes back to the way the train lines were privatised in the first place and the subsequent rate increases which have been allowed. The government agreed to fares increasing at an above cost of inflation. This was part of the government's plan to shift the cost of transport more from taxpayers to fare payers. Seems sensible enough on the surface, but then what's the point of privatising the railways in the first place then if you're just shifting costs from taxpayers to fare payers? Plus private companies have to make a profit, so now you have an added cost to bear. And as any UK taxpayer will tell you, taxes have gone up, not down, so you can't say that taxpayers have really benefited.
But really, what I don't think politicians understood is the impact of compounding fare increases at a rate greater than inflation. As any long-term investor will tell you, the power of compounding has the greatest impact of any factor over the long-term. The chart belows shows the impact of this compounding. Basically, while inflation has a little more than doubled since 1987, rail and bus fares have gone up by 350%.
So the UK has most expensive fares overall in Europe, including Norway where I had a pizza for 24 pounds! UK passengers are paying 1/3 more on an inflation adjusted basis than they used to. A walk up fare costing 10 pounds in the UK would cost 7.1 pounds in Norway, 4.3 pounds in Spain and Germany, 2.4 pounds in France, and 1.8 pounds in Italy. Now to be fair, average fair prices aren't as egregiously different, but you get the message. And one really can't say that service has improved, trains at rush hour are up to 80% over capacity (a safety hazard?), and many of the train companies run fewer than half of their service on time.
By the way, why should fares be indexed to inflation in the first place? Isn't the point of privatisation to improve productivity and efficiency, which would mean that prices should increase at less than inflation, i.e. more value for money so one is better off? And what is a private operator's incentive to become more efficient if they are allowed to pass on ALL cost increases directly to fare payers? The airline industry, which is one of major successes of privatisation, has barely raised prices since the late 1970s, not just on an inflation-adjusted basis but on an absolute basis as well (most of any price increase on airline tickets have come from higher airport charges, but that's for another day, another blog). That means that rail and bus fares are now 3 times more expensive compared to airfares than in the 1980s!
My other major criticism is the privatisation process itself. The government is also now awarding tenders for franchises to the highest bidder. On the surface, this seems to make sense, but the result is that firms pay a large upfront fee to the government (this is basically a tax with no benefit to the consumer). The firm then tries to pass on the costs to consumers; if it fails, the firm hands the franchise back to the government, at the cost of the taxpayer.
A couple of years ago, I was talking to the ex-head of a private equity firm, who acquired a major rail franchise during the privatisation process. He said it was one of the most profitable deals they ever did. Now a private equity firm is suppose to earn 20%+ returns, so you have to wonder what type of returns that they got if it's one of their best deals ever. But if you're the government and you have a private equity firm which needs to earn 20%+ returns knocking on your door wanting to buy a rail franchise, doesn't that make you think that perhaps the prices you've set for fares may be a bit too high? I posed that question to the guy, and he said what made the deal so great was that the fares were set as such a favourable level; they also bore virtually no risk and got all the upside. I asked whether they needed to make the railway more efficient to generate their returns, to which he commented that there wasn't a need as they could pass the costs on to consumers. That rail franchise happened to be the Great Western Railway! So there is such a thing as a free lunch...it's called the UK government.
